Why does the bank care where the downpayment is coming from???
What’s the big deal with documenting the buyer’s downpayment and funds to close?
Many lenders have changed the maximum required number of mortgages that a buyer/owner may have outstanding. Prior to this policy change in September 2008, some lenders would allow a borrower to hold up to ten mortgages. In this new market, the outstanding mortgage limit was reduced to four with most lenders that sell to Fannie and Freddie.
With the reduced number of allowable mortgages, current low rates and deep discounts on real estate, some investors have started to use the old tactic of straw buyer purchases.
What’s a straw buyer: A straw buyer is someone that stands in place of an investor in order to purchase a property as an owner occupied residence in order to receive more favorable terms.
Example: Jim is an investor and Jim owns ten homes with six mortgages. Obtaining a loan for Jim would be difficult, and even if Jim could get the loan, the terms might be considered prohibitive. Rather than apply as an investor Jim asks a friend (that doesn’t own a home) to purchase the property as an owner occupied residence. The problem is Tom doesn’t have any savings or downpayment. This is where Jim comes in. Jim needs to give Tom the downpayment and closing costs. Tom gets the $15,000 and deposits it into his account not realizing the bank will require deposit verification.
The mortgage company requests bank statements from Tom and also sends out a verification of deposit. The information comes in and the underwriter notices the large deposit. The lender is obligated to determine the source of all large deposits that are outside of a normal deposit routine.
Whether it’s a true gift received from a family member or something else, now more than ever we need to be mindful of the issues surrounding funds to close. Call if you have any questions about the topic.
Gil Kerbashian
Mortgage Lending Since 1997
(847) 873-7295
www.gilkerk.realestateloans.com
Why its Easier to Refinance than Purchase
Refinancing your home mortgage loan has always been easier to do than obtaining a home purchase loan. Borrowers often see refinance loans as any other. If borrowers took a closer look, they'd realize there are valid justifications for this precedent.
Seasoning is an important term in the mortgage and real estate loan industry, and most important with mortgage refinance loans. "Seasoning" a loan means that the borrower has had time to show they can make the payments on-time for an extended period of time. A new home purchase vis-à-vis payment seasoning, is something that a new home purchaser cannot offer to a lender as a form of security. Not only is the seasoning of a mortgage a factor in risk assessment, so is built up equity. Equity is the accumulated ownership stake one attains as property values increase and after mortgage payments have been made for an extended period of time.
It’s usually the case that over dinner, people will talk mortgages. Dad tells his Son that he refinanced and got a 5.25% rate with very little paperwork. Son feels bad because he just bought a house with a rate of 6.125% and lots of paperwork. I don't really recommend these kinds of conversations unless the family is filled with CPA's and can read through numbers. Even if everyone did tell the truth about their rate, all too often the details are so different that no one at the table can fairly compare mortgage rates. What are credit scores? How many points did you pay? How much were the fees? Was there a prepayment penalty? How much money is in the savings account? In essence how financially fit are you compared to others? All very personal questions and difficult to disclose with total candor.
Dad and Son take for granted that Dad has lived in his home for twenty years and has amassed a load of equity and payment seasoning. Son doesn't inform Dad that he did a zero down loan with not much savings to offset the risk.
If you are Son, then you probably got a good loan for your particular situation. My recommendation would be for you to pay the loan on time for at least a year and look to refinance down the road. By then you will have acquired some seasoning on the payment and some additional equity in the property. Banks appreciate seasoning and equity, and will reward you for it. Who knows, maybe you can beat Dads rate if the market is just right. Don't brag to him though, you might not get the biggest burger at the next barbeque.
Property Tax Credits Too Good To Be True In Illinois (but they are good and true)
Home buyers in Illinois are not only going to be given $8,000 at tax time next year when they (first time buyers) buy a home but they will also recieve a substantial property tax credit from the seller at close.
The tax credit is a standard benefit for all home buyers in Illinois and there is nothing nefarious about it. The net effect of this tax credit is to reduce the downpayment and closing costs at close of escrow. Illinois home buyers, if they have the right Realtor and mortgage professional, can structure a purchase to be very close to a zero downpayment transaction.
Here's how it works and how all purchase transactions should be structured in Illinois. I'm going to use a $100,000 purchase price to make the below transaction simple to calculate:
Purchase price: $100,000
FHA downpayment: $3,500 (3.5% required)
Closing costs: $5000 ($2000 applied to the required tax escrows/impounds)
Total buyer required funds to close: $8,500
You don't have the down and closing costs? Here's what you do...
Offer the seller $105,000 and ask the seller to pay $5000 towards your closing costs. The value of the house should appraise out if you've done your homework and found the right home.
In this one step you've reduced your total closing costs to $3675 downpayment. Wait a second you say.. you just said the downpayment was $3,500. Yes on a $100,000 purchase but now you're purchasing the home for $105,000 so the downpayment has gone up a small amount.
Now, all you have to come up with $3,675 which isn't too bad, and there are a couple of things you need to keep in mind for the downpayment:
Home buyers will receive a tax credit from the seller at close (see closing costs) even after the buyers have escrowed for taxes. Ok, so you've got the seller to pay your closing costs which also includes tax escrows BUT you as the buyer are still receiving the credit for the property taxes. Thats $2000 (or more) the buyer will receive at closing, knocking the downpayment down to $1675.
Closing costs: eliminated
Downpayment: substantially reduced
Catch? The buyer has to show $3675 in their available funds. The seller tax credit can't be used or calculated in assets and must be kept out of underwriting. The tax credit comes into play only at close.
How do I show the $3675? 401k... pension... gift funds from Mom, Dad, Granddad, Fiance, Boyfriend, Municipal downpayment program... there are a lot of resources out there, all you have to do is make a few calls. Its not that difficult. Need help, call me.
First Time Home Buyer Tax Credit 2009 Highlights
While the $15,000 credit died in House and Senate negotiations the $800 billion stimulus bill that President Obama signed into law Tuesday includes a smaller attempt to help the real estate market. Here are top things you should know about the $8,000 first-time home buyer tax credit.
- $8,000 for new buyers:This credit offers 10 percent of the purchase price of the home capped at $8,000 for first-time home buyers and principal residences. Does not have to be repaid.
- What's a first time buyer: A "first-time home buyer" is somebody who hasn't owned a principal residence for last three years. That means if you've owned a vacation home but not a principal residence you would still qualify for the credit.
- 2009 only: For purchases on or after January 1 and before December 1, 2009 are eligible for the credit. People that bought a home last year won't be able to take advantage of it.
- Income restrictions: The credit has income limits. Single buyers need a modified adjusted gross income of $75,000 or less and $150,000 for married couples. Higher income earners may be eligible for reduced credits.
- Tax Refund: Because the tax credit is "refundable" - buyers can take advantage of it even if they don't have much tax liability.
- Payback: Buyers have to own the home for at least three years. If they sell the home before then they will have to return the credit to the government- possible exceptions such as death or divorce.
Credit Repair in Illinois
Credit repair is a hot topic and getting hotter with each passing month. Mortgage lenders, auto loan companies and credit card issuers are starting to require much (much) higher credit scores from consumers.
This week, mortgage insurance companies have introduced stricter requirements for mortgage borrowers that require PMI for their home loan. In some states the credit score requirement to purchase a home with a loan needing mortgage insurance could be as high at 720. This score is not only good, some would consider it perfect or very near perfect.
If you are considering submitting for credit repair services be careful of the service provider you choose. Credit repair appears a little like subprime mortgage promises. The customers are acting solely on hope and some of the service providers are pulling bait and switch. Although the risk to the financial markets is almost nonexistent there is still a great deal of personal heartache to the consumer if the process isn't handled well.
I don't want to turn anyone away from credit repair. I SINCERILY URGE YOU TO MAKE IT HAPPEN QUICKLY, BUT MORE IMPORTANTLY, PLEASE DO YOUR RESEARCH INTO SERVICE PROVIDERS. Don't fall for false promises and always look for and try to secure a genuine guarantee of results.
Get your credit repaired today but do it with a reputable company or end up like this guy...
Senate Wants $15,000 Housing Tax Incentive Bicameral Conference Says NO
Many thanks to Congress for initiating the new tax incentive for purchasing homes, and some more thanks to the Senate for keeping it in the stimulus bill. The bill is now in the Senate. The Senate is starting to strip the bill of pork injected in the house, more kudos to the Senators. Will it make it all the way through? Call your representative to make sure.
Some may complain that the $15,000 won't do enough for the housing market. Hard to say but I sure hope it does. We know that the $7500 tax incentive didn't do much. Is $15,000 much better? I think so. Imagine being handed a check for $15,000 the next time you file your taxes. What a blessing. Especially for the young couple that needs to buy furniture, plates, paint the house, repair odds and ends, etc. Remember when you bought your first home and how wonderful a $15,000 check would have been to offset unexpected expenses? Of course.
There is 9 trillion dollars sitting in various forms of cash in this country. I'm sure there are lots of parents and grandparents that will recommend their kids and grandkids to get busy.
Take a look at number 5 and 6 below.
Here are the highlights:
- The tax credit is 10% of the purchase price up to $15,000.
- The tax credit is for one year (from date of enactment).
- The credit is available for both new and existing home purchases.
- This is for primary residences only, and the home must be owner occupied for two years after purchase.
- There is no income cap (the $7,500 tax credit had an income cap of $150,000 per year).
- Unlike the $7,500 tax credit, the new credit does not have to be repaid over time.
- The credit is limited each year to the amount of taxes owed in any one year (with the $7,500 tax credit, buyers received the entire credit and a refund if the $7,500 was greater than taxes for the year). Example: If you owned $10,000 in taxes for 2009, you could only use $10,000 of the credit to reduce your tax bill to zero for 2008. If you owed $3,000 the next year- 2009, you could use the remaining balance of $5,000 to negate what you owed in 2009 but that's it, you're done with the credit. Buyers can split the $15,000 into two separate tax credits to be taken in two successive years.
Its An AMAZING Time to be a Home Buyer
Here in Illinois, we have never seen a home buyers market like the one we're seeing now. Homes are being offered at deep discounts, sellers are willing to help with closing costs and as everyone knows mortgage rates are incredibly low.
Last night I prequalified a young teacher that was looking to rent a home for $1500 a month. Her Realtor wanted her to explore owning a home so he asked her to call me about purchasing. She was under the assumption that due to her credit and down payment shortfalls she would never be able to afford a home.
I really respect teachers and think the world of them. They work hard and should easily have a place to call their own. There is no reason that this wonderful girl shouldn't be able to own a home. She and I took the time to create a plan of action, something no one else ever suggested or offered to her...
I paired her with a credit repair specialist to correct some of the credit concerns and let her know that her parents could "gift" her the downpayment. The credit repair takes about 60 days and the downpayment will be waiting for her once she's ready.
She has two kids and wanted so bad to have a place for them to call home. Wouldn't you? She was so happy about the plan we put together but I think I was even happier because I was able to help someone that I admired very much.
78% of Illinois Qualifies
The USDA Rural Development 502 section loan is not for farms and it's not your run of the mill loan. Doesn't the 502 section sound sexy? No, well it is if you are a home buyer. So much so that if you were a first time buyer, you might fall in love. This loan is outstanding and totally unappreciated. In my opinion, the program is one of the top five best loans nationally. How does it work?
Surprisingly 78% of Illinois qualifies. The loan is geared to developing territories "outside" of city limits. In my area of McHenry County Illinois, outside of city bounds is about a 30 minute commute. Some of the cities that qualify are; Genoa, Union, Poplar Grove.. these are neat little cities with some great new subdivisions and only about a 30 minute communte to some nice cities such as Crystal Lake, Gilberts and others located near the Wisconsin boarder.
The terms of the loan are as follows: 100% financing, NO monthly mortgage insurance, 6% seller contributions and/or the borrower can finance closing costs if the appraisal comes in higher than the sales price.
What else?: 2% upfront mortgage insurance premium loaded on top of the loan amount (no cash required from the borrower), income qualification limits, the money may run out at times and there are geographic restrictions.
Any downside is immaterial, especially for first time buyers. If I could get this loan I'd jump at it in a heartbeat- its outstanding.
The best part of the program are the rates. My borrowers can get 100% financing at rates of 5.5% today.
Can you keep a secret? Don't tell the USDA but I think the person that created this program and set the rates was loopy. Any other loan with these terms should be priced at 8-9%. They're giving the money away. Hurry and get yours by calling me today.
