Tag Archives: FHA

I Can Afford That, Right?

When looking at buying a house, there are a lot of things to consider. Do you NEED a two-car garage or do you just WANT a two-car garage?  Do you have a school district preference or prefer a certain city so you can be closer to work?  Do you want a rambler or a two-story and do you need a fenced-in yard for your furry family member?  Do you prefer to avoid outside maintenance, making a townhome a better option?  Is it important the house is updated or are you pretty handy at DIY?

Some of these decisions are a basic “wants” vs. “needs” analysis. Obviously, if you had a household of four people, a one-bedroom home won’t cut it – that would be a “need,” whereas having a pool in the back is more of a “want.”  Lot’s of things to take into account.  The most important though, should be what price home, or payment, that you can really afford.  Buying a house isn’t just a house payment for the next 30 years – it’s a commitment along with other financial responsibilities.

Many of you may be renting right now and, quite possibly, could be paying more in rent than what you can afford for a house payment. One of the mortgage lender’s goal is to help you get financing, but the main goal should be to make sure that whatever financing you obtain, you are comfortable with the payment.  Let’s face it, you’ll have this payment for the next 30 years and eating ramen noodles every night doesn’t sound like fun.

So how do we determine what payment/price you can afford? Lenders use something called ratios to determine your qualifications.  Ratios take a certain percentage of your GROSS monthly income, taking into account other monthly debts you have, to come up with a maximum house payment.  Sometimes, that top-end payment is NOT what you want to pay because it puts you out of your comfort-zone.  And if that’s the case, please let your lender know that!  There is no reason you should ever pay more per month than what you financially can afford.  You know your spending habits much better than your lender.  That said, if you think you can spend more than what the lender determines you can afford, we can’t increase it just to make you happy.  To make that work, your income has to be higher, debts lower or you may need a co-signor or co-borrower to bring that payment to what you feel you can afford.

Different loan programs have different guidelines for ratios. One constant is that your monthly income is looked at in gross terms versus net (after taxes/deductions).  The exception to this is if you’re self-employed.  In this situation, we look at the NET profit or loss on your federal taxes (assuming a schedule C filing) since this is what you got taxed on.  Also, different types of income might be looked at as an average over two years.  You’d want to check with your lender about how they will look at your specific situation.  For now, let’s keep this simple and use an FHA example assuming the person is salaried at $5000/month and has $650/month in debts.

In the example below, notice that there are TWO percentages being used. The first, we call the housing ratio.  This determines the maximum house payment you can make based on your monthly income.  The second is called the debt ratio.  This is based off your monthly income too, but now factors in any monthly debts you have (credit cards payments, car loans, other house payments, installment loans, lines of credit, ongoing payments to the government for taxes, alimony, child support, overdraft protection balances, etc.)  We will take the lesser of the two calculations to determine the maximum payment you can afford.  FHA guidelines allow 31% for the housing ratio and 43% for the debt ratio.  Some lenders may be willing to exceed these ratios, please check with your lender.

 

 

In this example, the buyer can afford a $1500/month house payment. The payment includes principal and interest on the loan, a monthly amount for property taxes and monthly amount for hazard/homeowner’s insurance and monthly mortgage insurance, if applicable.  If you were looking at a townhome, or something with monthly association dues, the lender would also factor this into the maximum payment you can afford.

Let’s say $1500/month puts you at a purchase price on a single family home (no association dues) at $220,000. You’ve gotten yourself pre-approved and are out looking at homes.  Did you know that you could look at multiple homes, ALL listed at $220,000, and possibly not qualify for ANY of them?  I know, I know … but your lender said you could look homes at that price.  So what gives?  Ultimately, you are getting pre-approved for a house payment, NOT a price.  The price of the property is a guide, so to speak.  In this example, if the lender used $229/month for the property taxes and ALL the homes you looked at had taxes higher than $229, then your payment would end up being higher than $1500, hence you wouldn’t qualify.  Not only will taxes affect the price you can afford, but so can the interest rates, association dues and hazard/homeowner’s insurance.  These are all moving parts to the home purchase puzzle!

As lenders, we do our best to give you an approximate price point, but knowing the above will hopefully help you understand that some houses you look at, though you were told the price would work, just won’t. Alternately, the house you look at could be $190,000 and the taxes could be crazy high,  making the payment higher than $1500, meaning you can’t afford even THAT lesser priced home.  It’s nuts, I know.

Remember I mentioned this was a single family home? Pretend you change your mind and start down the townhome or condo path.  If that should happen, then your $1500/month payment MUST also take into account association dues, which can vary dramatically.  This will lower your purchase price power approximately $20,000, maybe more depending on the dues.  Best advice here – talk to your loan officer if you decide to change property types so you can get a more accurate price range to be looking in.

So the question – “I can afford that, right?” has the wishy-washy answer of “maybe.” First, remember your income and your monthly debts will determine WHAT payment you can afford monthly.  And second, the payment you can afford will get varying results on whether you can afford a specific house depending on interest rate, property taxes and homeowner’s insurance amounts.  Your lender will get you pretty close to the price range you can look in so you have a starting point, but at least now you have a better understanding as to why you might not be able to buy the house you thought you could afford.

My goal is to provide education and a clear understanding of the process and your goals. It would be my pleasure to help you with your homeownership journey.

A Necessary Evil and A Little History Lesson

If you are like many people buying their first home, or subsequent home, it may be tough to come up with a large down payment or much of any down payment. Whether it’s just hard to save, debts are too high or you aren’t realizing enough equity from the sale of your home, down payment savings are tough to allocate.

Ideally, a 20% down payment is the goal to shoot for in order to avoid PMI or MI– private mortgage insurance or mortgage insurance. Reality is, most people, just don’t have that, so they must contend with the necessary evil of paying for mortgage insurance in their house payment.

But is PMI/MI really all that bad? First, let’s look at some history of down payments.   In the early 1900’s, down payments were commonly 40%- 50% for conventional financing – wow!  Of course, a house back then, may have only cost $5,000 – so $2,500 doesn’t seem like that big of a deal, BUT when annual incomes were approximately  $600-$700/year, that made coming up with that money hard, maybe even impossible

To help stimulate the economy, in 1934, FHA (Federal Housing Administration) came along with an alternative to conventional’s large down payments – they offered a minimum down payment.  With it, they charged mortgage insurance on an annual basis (factored monthly into the payment) and also collected an amount upfront called the Upfront Mortgage Insurance Premium (UFMIP), which is financed into the loan.  Throughout the history of FHA, the required down payment, annual MI and UFMIP amounts have adjusted to FHA’s needs (government loan type).

In the late 1950’s, conventional financing wanted to get in the game and make housing more affordable, so in came Private Mortgage Insurance companies (PMI). This insurance, paid for by the buyer, helped lenders feel more comfortable with smaller down payments.

So what exactly does PMI/MI do? Unfortunately, it doesn’t do anything for you.  It is all about insuring the lender in case you default on your loan.  If the lender has to foreclose due to non-payment, they can fall back on this insurance to help cover some of their losses.

With conventional financing, there are certain coverage percentages which differ with PMI depending on your down payment amount and your credit score. If you use a first time buyer program, with PMI, you may even have a lower percentage, thus a lower PMI payment.

FHA’s annual amount for MI doesn’t vary on the credit score. If you put more than 5% down, you will have a lesser annual/monthly amount for your MI.  Even if you put 20% or more down, you WILL still have the upfront and the annual MI with FHA.

What about getting rid of the PMI/MI? This differs by program.  With FHA financing, you can’t get rid of the MI – it will be on your loan the entire term you have it.  Only caveat is if you start with 10% down, the MI will eventually drop off.

With conventional PMI, it will automatically go away when you reach 78% loan to value (LTV) of the original value (purchase price) of your home – or 22% equity. Fortunately, with PMI, you can be proactive and attempt to remove this sooner than that.  There are essentially two opportunities, but ultimately, the servicer of your loan (company you’re making payments to) will be the decision maker here on whether they allow this.

First, your LTV must be at 80% or less of the original value based on your amortization or actual payments you’ve made.

Or second, if you can show with a new appraisal that you have the necessary equity required by the servicer, you could request the servicer to drop the PMI.  Ultimately, cancelation is still up to the servicer.

So, the necessary evil isn’t really evil at all – it’s really a GREAT opportunity for you to buy a home without needing 20% down, without having to scrape and save every penny you earn. And, if you’re eligible, you could even get assistance for that down payment with one of the many first time/subsequent home buyer programs available in Minnesota!

End result: the necessary AWESOMENESS is that you can get into a home sooner than later due to this little necessary evil!

You ARE Worthy!

Life is hard, and at times, just not fair!  Things happen – whether it’s a job loss, divorce, decline in home values, medical emergency or death in the family.  These things wreak havoc with our financial well-being.

The above reasons, and I am sure many more, played a large role in people filing bankruptcy, losing their home to foreclosure, or for some, having to sell their homes as a short sale just to get out from under.  It’s tough, and for those of you who experienced these major set-backs, I am truly sorry you had to deal with such devastation!

ID-100142021You might be thinking your chances of owning a home for the first time, or ever again, will never happen after these experiences.  I am here to tell you that we all have second chances and you are worthy of being a homeowner!  But how?

First, it helps to know the general guidelines for loan qualification after a short sale, foreclosure or bankruptcy.  The guidelines vary by the type of loan you take out.  FHA, the Federal Housing Administration, will be more lenient than Fannie Mae or Freddie Mac, which offer conventional loans.  Sometimes, there are extenuating circumstances that could lessen the wait period, but those are considered on a case-by-case basis.

Bankruptcy – home financing eligibility date is taken from the date the bankruptcy was discharged from the courts.  It is also dependent on the type of bankruptcy – Chapter 7 or 13.  I will advise for Chapter 7 bankruptcies, but the wait period may be less with a Chapter 13 if certain requirements are met.

  • FHA & VA:              2 years
  • Conventional:   4 years

Foreclosure – eligibility date is taken from the latter of the sheriff’s sale date or the date the claim was paid to FHA.  The claim date is only applicable if the loan foreclosed upon was FHA financing.  This date is usually 3-6 months after the sheriff’s sale.  Conventional financing could have a shorter waiting period depending on circumstances and other criteria.

  • FHA:                          3 years
  • VA:                             2 years
  • Conventional:    7 years

Short Sale – eligibility date is the date the sale of the home took place.  The waiting periods are the same as a foreclosure, except with conventional, where the waiting period can vary depending on the circumstances, as well as the amount of money you have down.

Once you’re over that waiting period, then what?  As lenders, we certainly want to see that you’ve re-established credit.  We understand that your credit and finances took a beating during that time – it happens!  But, we want to see that you came out in a better place.  We’re looking for on-time payments and a lack of derogatory credit, such as collections or charge offs.

Long and short of it – you ARE worthy, and after having a bankruptcy, short sale or foreclosure in your past, there is hope of becoming a homeowner!  We’d love to help!

*Image compliments of Stuart Miles — freedigitalphotos.net

 

No Credit = No Loan … or Not?

You hear all over the news and in advertisements how important your credit score is. I agree … your score is absolutely important and has become the first go-to thing lenders look at. We want to know what the score is, how long you’ve had credit and how well you pay your bills on time.

But what if you’re one of those people who don’t have a credit score? It happens, even to some people who have some credit established. Maybe the history isn’t enough for a FICO (Fair Isaac Corporation) score to be generated or there are just too few items on the report.

credit  cardI’m here to give you some hope. Not all loan programs require a credit score. The main criteria – you must meet the eligibility requirements of a Minnesota first time homebuyer program. In conjunction with this, we will use FHA financing which allows us to evaluate credit not necessarily reported to the credit agencies.

Really, what it all comes down to is what you have for debt obligations outside of a traditional credit report. It’s imperative that we review credit for the lending process. This means we’re looking for accounts that you pay on a monthly basis, ON TIME and over the last 12 months. Our goal is to analyze three accounts, but that’s not set in stone.

So, what do we look at? Are you renting? Are your payments on time? If it’s a management company or apartment complex you pay, we can verify directly with them your timeliness. If you pay a private party, such as a private landlord, or your parents, we want to see the last 12 months cleared checks, or auto withdrawal, from you to demonstrate you’ve paid on time. As a tip, if you’re living at home, it makes sense to pay something to your parents, EVERY month, for 12 months, always due the same time (say, the 1st of the month) and by check. This way, regardless of the amount, we can look at your history as a source of credit.

What about other sources? Here is a quick reference list of items that you may pay monthly that can be used to develope your credit history. This list isn’t all-inclusive, but a way to get you thinking about what you have out there and how it can help you get your first home! Remember, these items must be in your name.

Utilities, cell phone, car insurance, weight loss plans, lot rent for a mobile home, renters insurance, health club payments, child support/alimony paid separately from your work paycheck, Netflix, gaming sites, internet services, lay-away or monthly payments to a doctor

Not all lenders allow the evaluation of credit from these sources, so you’ll want to ask ahead of time. The main idea I want to get across is that having no credit doesn’t necessarily mean no loan. It’s best to find a lender you’re comfortable with and one that has the ability to walk alongside with you to make your dreams become reality! I am here to help if you so desire!

 

A Wolf in Sheep’s Clothing?

Lately, I have been helping a lot of people purchase their home and it hasn’t been a traditional single family home.   Many MN first time homebuyers opt to purchase a townhome or condominium because it works in their price range or their lifestyle.

When I say “condo,” what do you visualize?  Do you see a high-rise building that resembles an apartment complex?  These are typical versions of condos, and believe it or not, many apartments have been converted to condos, which may explain why they look like your first apartment!  These properties are perfect for many people, but some might prefer a traditional townhome.

Be aware that some condos are like a wolf in sheep’s clothing — on the outside they look like townhomes and feel like townhomes, but on the legal description of the property, they’re condos.  So what does this mean to you?

Simply put, the difference between them has to do with ownership of the land beneath the unit.  You own the land if it’s a townhome, you don’t if it’s a condo.  This differentiation is really a moot point since both properties are part of an association which governs what you can do to the property, or what you can’t do, such as bulldoze it down and build something new.

Most condos have a shared water line.  Water comes into one meter at the complex and then individual lines go to the units.  The water is part of the association dues you pay on a monthly basis.  Usually, in a townhome, you will have your own water meter and will be responsible for this utility on your own.

The most important differentiation may come with financing.  Getting a loan on a condo can be tougher than a townhome.  Many years ago, condos got a bad rap.  Investors would buy condos as rentals and if their rent was not paid, they would let the properties fall into disrepair. Now there is a stigma tied to condos that’s been hard to shake!

Some loan types, such as FHA, require the complex to be approved by FHA in order to be eligible for financing.  If it’s not approved, you may have a difficult, or drawn out process buying a condo in the complex using FHA financing.  For some, conventional financing may be the only option available in this situation.

Regardless of financing types, even IF it’s FHA approved, the lender will receive a questionnaire completed by the association to make sure the complex is financeable.  The lender will consider how many units are rented, how many are owned by one person, what their budget looks like, and most importantly, if the association is currently in litigation.

The biggest thing to take from this is many townhomes are really condos in their legal descriptions.  And to be clear — just because it’s a condo doesn’t make it a bad property type to purchase, or make it a bad investment, it just means there may be some extra hurdles with financing.   Make sure you work with a lender and realtor who can help you be sure what you purchase is a sheep, and not a wolf in disguise!  It will make the financing process go that much more smoothly!

 

Dakota County + Conventional Financing = Happy Homebuyers

Shout out to our partners at the Dakota County CDA!  For as long as I can remember, they have only allowed FHA or VA loans to be used in conjunction with their MN first time home buyer program.  They now allow a 30-Year fixed conventional financing option via the HFA Preferred conventional program and this is great news.

As a refresher, all MN first time home buyers must qualify for a basic loan program — FHA, VA or conventional financing.  I look at this as the cake.  As long as you meet the parameters for credit, income and assets for the specific program, you can qualify for your loan — the cake.

One step further, if you meet the parameters of the first time home buyer program, such as the one in Dakota County, you could then get down payment and closing cost assistance — which is the frosting on your delicious cake!  Now wouldn’t that be sweet?

There are guidelines for the conventional loan that must be met in order to qualify.  First, ID-10039817there is a minimum credit score of 640  to even be eligible for the Dakota County  program.  The required down payment is at least 3% and you must contribute $1000 of your own money (no gift) to the transaction.

Since you have less than 20% down, you will be required to have private mortgage insurance, also known as PMI.  The good news is that the PMI for this first time buyer program has reduced coverage requirements which may result in lower monthly PMI payments.

You can learn more about the Dakota County program here, but as a quick recap, they offer three different down payment options.  These are dependent on your household income, but range from 3.5% of the purchase price (max of $7500)  up to 10% of the purchase price (max of $10,000).  As with all MN first time home buyer programs, the assistance is a second loan against your property.  If you sell or refinance your home, the second loan becomes due and payable.

Another requirement for this program, as with other MN first time buyer programs, is to attend the Homestretch class.  This is a worthwhile, 8-hour class that will teach you everything you need to know about buying a home, the process, as well as keeping your home.  You can find classes at the Homeownership Center. Costs for these classes will vary on the location you choose, such as directly from Dakota County or another provider.

I am an advocate of the in-person class because you can learn so much from other attendees.  If it doesn’t work in your schedule, you can “attend” the class online via their Framework class.  If you go this route, you will also need to set up a one-on-one meeting with a first time buyer specialist at the Dakota County CDA.

I am excited we can now offer conventional financing with Dakota County.  They have a wonderful program and for those of you with higher credit scores, it may be a much better financial option to FHA financing in terms of your monthly payment.

As always, it would be a pleasure to discuss your situation to see which cake you qualify for and what type of frosting we can layer on top!

*photo courtesy of  Salvatore Vuono, freedigitalphotos.net

 

Dakota County Makes Similar Changes to MN Housing

MN first time buyer programs are required to follow specific guidelines in terms of maximum income limits and sale price limits. Recently, MN Housing announced changes to their income and sale price limits. Dakota County has as well.

Like MN Housing, they have reduced their income limits DOWN.

  • 1-2 Person Household Max $82,900
  • 3+ Person Household Max $95,335

    courtesy of Ponsulak|freedigitalphotos.net
    courtesy of Ponsulak|freedigitalphotos.net

They have also changed their maximum sale price to $273,570. This means that the purchase price of the property you’re purchasing cannot be higher than this price, not even by $1!

Dakota County is a fantastic opportunity for the those MN first time home buyers looking to purchase in the Dakota County area. They offer competitive rates with only a .5% charge in origination fee.

Their program has three different levels of down payment assistance which is based on the household income and household size. The levels are either 10%, 5% or 3.5% of the sale price toward down payment and/or closing costs. You must have at least $1000 of your own money into the transaction.

Dakota County also offers the MCC program which means not only can you get their assistance, but you can also get a credit of up to $2000/year toward your tax liability for as long as you have your loan. It’s always a good idea to check with an accountant to determine if this part of the program is right for you.

There is a separate approval process with Dakota County to determine if you’re eligible for their assistance. Your loan officer will run the income calculations to make sure you’re within their limits, but the ultimate decision as to whether you get the assistance is up to our partners at Dakota County.

We’re fortunate south-of-the-river to have such a great program. I’d love to help you figure out what programs are best for you!

Would You Like to Save $2000 Each Year?

Kind of a general title.  So how do you save the money?  Do you have to clip coupons, cancel your Netflix or DirectTV or sign up at save-2000-a-year.com?   The simple answer … you need to buy a home.  And, well, you need to use a MN first time home buyer program with the MCC.

Pretty easy, right?  What is MCC?  It stands for Mortgage Credit Certificate.  This is available to MN first time home buyers.  Both MN Housing offers this credit, as does the Dakota County program, for homebuyers buying in Dakota County.

courtesy ddpavumba | freedigitalphotos.net
courtesy ddpavumba | freedigitalphotos.net

So what is it?  It’s not cash paid to you or a big fat check you get yearly, but it’s almost as good.  It’s a credit you can use AGAINST your federal tax liability.  Yes, I said liability.  That means, you need to actually OWE the IRS money.

Pretty scary especially if you’re accustomed to getting money back.  Some words of advice — you should plan your exemptions to break even.  This way you get more money in your paychecks to use throughout the year and not let the government hold it like an unaccessible piggy bank, paying no interest.  That’s my soap-box.

Back to the topic at hand.  The MCC credit … how does it work?  As you may know, when you’re a homeowner, you have a tax deduction of the interest you pay annually, along with the property taxes.  In order to take advantage of this, the deductions need to EXCEED the standard deduction you are allowed by the government.  Sometimes, the loan amount isn’t high enough to accomplish this.  Wouldn’t it be great if you could still get a benefit or get one in addition to the allowed deductions?

Before I go on, let me say, I am not an accountant, so this is where you should consult one to determine if the MCC is right for you.  As I mentioned, you need a liability.   If you break even or get money back, you won’t get the MCC advantage.

The MCC is equal to 35% of the mortgage interest you paid, NOT to exceed $2000.  Let’s say your loan amount was $150,000 with a rate of 4.25%.  That means, you had $6375 in interest paid for the year.  35% of this is $2231.  As you may recall, you’re capped at $2000, so in this scenario, you can use the FULL $2000.  This credit is something you can use EVERY year  you have your mortgage, so you can see this credit can totally add up!

To take the example further, let’s say you owe the IRS $1000.  That credit will wipe out what you owe the IRS.  The other unused $1000 you can carry over for up to 3 years to use, but in each year, you’re still maxed at the $2000.  On the other hand, let’s say you owe the IRS $2500.  In this case, you can wipe out $2000 and you only need to write a $500 check.  Yup, it’s that awesome!

A few things to note.  You had a full $6375 in interest.  If you use the full $2000, then you can only use the remaining $4375 as a tax deduction on your taxes.  Still not too shabby to literally get FREE money to offset what you owe the IRS.  Here is where the accountant comes in.

You need to work with them to determine what you should claim as your federal exemptions in order to create a tax liability.  Not only is getting FREE money so cool, BUT, each paycheck you realize MORE money because less is going to the IRS.  It’s a win-win all around.  Oh, and if this isn’t enough, if you qualify, you can get down payment assistance WITH the MCC!

Not all lenders offer the MCC program, even if they do handle the MN Housing or Dakota County programs.  I do, of course, and would love to help you make the most of buying your first home!  Yea tax liability!!

Assistance … Not Just for First Time Home Buyers Anymore!

For as long as I can remember, down payment assistance has been associated with MN first time home buyers, meaning the only way someone qualified to get down payment or closing cost assistance was they had to buy their very first home.  This definition is actually broader than a true first time home buyer and applies to anyone who has not owned a home in the last three years.  The broader definition has helped those people who may have experienced a foreclosure or short sale be considered MN first time buyers, enabling them to get assistance.

But what about buyers who own a home now and need assistance?  Is there any help for those folks?  I think many people would consider selling if they had a way to come up with the money needed for their 43next move.  Unfortunately, some people are having to pay to get out of their current homes, leaving them with nothing for the next home.  This just makes the process of moving impossible.  The good news, and answer to the question, is YES, there is help for these folks, thanks to our partners at MN Housing.

Over a year ago, MN Housing introduced the Step Up program.  This is specific to those people looking to refinance a home where they had down payment assistance or to purchase a new home where the NEED down payment and closing cost assistance.  The available loan types are the same as the Start Up program, which is specific to MN first time home buyers.  We can use Step Up with FHA, VA or conventional financing.  The home the borrower currently owns MUST be sold prior to closing on the new home.

The assistance is a true second loan against the home and is required to be paid back.  It’s called the Monthly Payment Loan (MPL). The interest rate on this second loan is the same as the rate the borrower has on their first loan.  All rates are published on MN Housing’s site.

The assistance is equal to 5% of the sale price of the home and the term of the loan is amortized over 10 years.  Most minimum required down payments range from 3 – 3.5%, making ALL the down payment covered by the assistance.  The leftover amount can go toward closing costs.  If worked into the purchase agreement, the seller could cover some, or all, of the closing costs as well, making it so the borrower may only need the required minimum investment of $1000!

As with all MN Housing programs, there are income limits that the household must be under to qualify.  For a 1-2 person household, the limit is $83,900.  Recently, the way income is calculated with Step Up changed, making it so more people can qualify for the assistance they deserve!

If you’re looking to move up to your second, third or even fourth home and need some help getting there, please don’t hesitate to contact me.  It would be a pleasure to see if the Step Up program will benefit you and get you moving up sooner than later!

You … from the Underwriter’s Perspective — The Final “C”

We’ve made it to the final “C.”  Thing about this “C,” is it really isn’t about YOU this time, as the title of this blog suggests.  It’s about the home you’re getting a loan on, lovingly known in our world as Collateral.

As lenders, we really want to make sure that the home we’re providing a loan on is a good investment.  Certainly, we don’t want to be left owning the home if anything goes south with your payments, but if it does, then at least we know we have a pretty good chance of selling it.

house dollar symbolIn order to determine the quality and value of the collateral, we order an appraisal on the home.  This is a third-party assessment in terms of value and marketability.  Since you paid a certain price for the home, we definitely want the house to at least be worth what you paid for it.

The appraiser will look at comparable properties to determine value.  They will look at like-styled homes.  If the home you’re buying is a 2-story, then they need to look at other 2-stories.  Comparing the home to a rambler, one-level, isn’t comparing apples to apples.  They’ll look at homes that have closed in the last 6 months or less and are located within a mile of the subject property.  If appraising a townhome, they need to find comparable homes in the same complex, if possible.  Similar size and amenities are important for comparison– number of bedrooms, bathrooms, etc.

Based on the comparables, the value could come in higher, which is great for you, but it doesn’t play at all into the loan.  For instance, if you’re doing 5% down and the appraisal comes in high enough to give you 10% equity, it won’t matter.  All lenders will lend on the LESSER of the appraised value or, in this case, the sale price.

If, however, the value comes in less than the purchase price, you may have to come up with more money.  In line with above, if you’re doing 5% down, the 5% is off the LOWER appraised value.  You’ll have to pay the difference between the price and appraised value.  More than likely, your Realtor will go back to the seller to re-negotiate the price down to the actual appraised value. Hopefully, this works out in your favor!

The appraiser is also looking at marketability.  They will look at the home style, location, as well as any concerning factors — like is the home backed up to an apartment complex or an active railroad?  These things won’t necessarily make it so you can’t get a loan on the home, but they absolutely affect the marketability of the home.

What about the condition?  Is the home in decent repair?  Does it have any major issues — foundation or structural concerns?  How about standing water or peeling paint?  Some of these things can be fixed and could become a “work order.”  The type of financing will determine what items are required to be repaired.

For instance, FHA financing will require any peeling paint, in or out of the home, to be scraped and repainted IF the home was built before 1978.  This is due to the possibility of the paint being lead-based.  FHA is all about safety.  If a work order is called, the work must be completed prior to closing in order to pass the FHA appraisal.  What if the seller won’t do the work?  You an check out the 203K loan we offer to help in this situation.

The appraisal is an opinion.  This is why we have the underwriter look at it as part of your file.  Of course, being that we’re placing a lien against the property, the collateral “C” is a big part of the underwriter’s decision.  But, as explained in the last three blogs, it’s not the only “C.”  As with the others, there is more that’s taken into account with Collateral and this is just a summary.

At least now you have a good idea of what goes into YOU from the underwriter’s perspective.  If I can help you navigate these waters, please give a shout.  It would be my pleasure!