ASK THE REAL ESTATE EXPERT

Start by getting your credit in order. Go to Annual Credit Report.com. There you can order free copies of your credit report and find resources to help you clear up any credit problems.  The better your credit, the easier it will be for you to get a loan,  so it's well worth your time to try and clean up your credit report before you apply for a loan. 

Next, review your spending and savings habits. You will need money for a down payment. If you don’t have the money already saved, start saving now. If someone is planning to gift you the funds, see if they would be willing to do so sooner rather than later. Why? Let’s say your parents plan to give you $10,000 towards your down payment. You find a home you love, make an offer, and the offer is accepted. You call the folks, tell them the good news, and they send you the money which you deposit into your savings account. Suddenly you get a call from your lender asking where this money came from. You will now have to go through some hoops to prove the money is, in fact, a gift and not a loan. The folks may have to sign a document stating that they never intend to have you pay back the money. Often people don’t like having their motives questioned and I’ve seen situations where this has caused a rift between parent and child. If, however, you have the funds in the bank before you apply for the loan (usually 3 months will do the trick) the lender usually will not question the source of the funds.  

OK – you’ve cleaned up your credit and stashed away the down payment. Now you need to find a home.  Before you go house-hunting you need to know your price range. Start by talking to your lender to see how much you can borrow. Add your down payment to the loan amount and you’ll have a good sense of the price range the lender thinks you can afford.

But that’s only half the story. You need to do some soul-searching before your start house-searching. Let’s say the lender says you can afford monthly payments of $2,000 per month. Presently, you pay rent of $1,000 per month. That’s $1,000 less per month  you presently pay for rent than you would need for your proposed loan payment. But at the end of each month when you look at your checkbook, the balance is $0. What happened to that extra $1,000? If the answer is you spent it on movies, vacations, and going out to eat, you need to decide whether or not you can live without these luxuries. Remember, you are not just buying a home; you are also buying a lifestyle. If you cannot-  or will not -  live without these “extras” then you either need to scale back on the price of the home or keep renting.

You've checked your credit, saved up for the downpayment, and decided on an appropriate home price. Now all you need is a great Realtor to help you find your new home.  If you need help finding one, just let me know!

Before you buy any investment, you need to ask yourself some basic questions. 

First, are you emotionally prepared to be a landlord? If the toilet starts to leak on a Friday night, will you be willing to cancel your weekend plans so you can meet the plumber out at the property? If the tenant stops paying rent, can you handle the emotional upheaval that comes with an eviction? 

The second question you must ask is whether or not you are financially prepared to carry the cost of owning property for at least three months. There will be times when the property is vacant or when repairs are needed. This will require you to come "out of pocket" to cover these expenses. You simply can not assume the rent will always be there. If you do not have a reserve from which you can draw when problems arise, you will soon find yourself in financial trouble. 

Next you need to consider what type of property to buy. This will be dictated, to some extent, by your finances. Assuming you are looking at a small investment property (1-4 units), you need to decide if you want a multi-family or a single family home. Multi-family units are more expensive to purchase and maintain. However, the vacancy risk is spread out over a number of units. For example, if you have a single family home as a rental, when it is vacant, all your rental income is gone. If you have a duplex and one unit is vacant, you still have rent coming in from the other unit. On the other hand, the more units you have, the more maintenance is required, both in terms of managing the property as well as managing the tenants.  

If this is your first rental, you may want to consider a condominium. You will have to pay homeowners dues, but you will be relieved of many maintenance issues such as gardening, roof, exterior paint, etc. Before you buy, make sure to check whether or not the Homeowners Association restricts the number or type of rentals. If you don't, you may find that you have purchased a home that can not be rented. It's hard to manage property and harder to manage people. Of course, you can always hire a property manager. But that becomes an additional expense that must be factored in to the cost of ownership. And you need to be prepared to manage the manger.  

Then there is the question of rental control. Check both  state and local ordinances to see if there are any rental restriction policies governing the property.  And you should also see if there are additional fees for rentals in your community. These could be fees required by a local rent board, or your city requiring that you get a business license. 

The bottom line is, you must approach real estate investing as a business. And, as such, it requires research to make sure you know what you are getting yourself in to, both financially and emotionally.

In a word - "yes". Instead of calling the listing agent, you should have had your own agent make an appointment to show you the property. 

Look at it from the listing agent's point of view. They  took the time to meet you at the property, show it to you, answer all your questions, maybe even give you pricing comparables for the house and advise you on the best structure for an offer. You used their time and their expertise. But you didn't want them to get paid for that. 

Instead, you handed the fruits of their work over to another agent. In effect, you said that their time and knowledge were worthless. Sure, they would still get part of the commission if you bought the home through another agent. But you increased their work without increasing their pay. And you took up their time that they could have spent working with their own clients. 

No wonder they were upset - wouldn't you be if someone did that to you?

Here are some guideposts to consider when shopping for a loan.  

Avoid any lender who suggests or requires you to falsify information on your application. If you’re caught, you could be prosecuted and, if convicted, penalties range from fines to jail term. Even if the bank does not prosecute, they could require you to immedaitely pay back the loan in full.  Do not allow yourself to be pressured into borrowing more than you need. The only reason a lender wants you to borrow more money is to increase their commission.

And, along the same lines, don’t be pushed into accepting monthly payments you can’t afford. Even if you qualify for higher payments, your lifestyle may not allow you to use every spare penny to pay your loan payment.

Every lender is required to provide you with loan disclosures within three days of applying for a loan. If your lender fails to give one to you, they are breaking the law. The disclosure must include the loan’s annual percentage rate (APR) as well as an itemized list of closing costs. The APR is a formula that takes into account both the rate and the fees of each loan. It is a way for you to be able to compare loans of varying terms.

Be wary of terms that change during the course of the approval process. It is possible that rates and terms may legitimately change during the weeks of loan approval. But be sure to get an explanation from your lender. And if anything smells funny, back up and review all the paperwork again. You might even consider contacting another lender.

If your lender tells you it’s OK to sign blank forms, cancel the deal. You should NEVER sign a blank form.

And finally, if the lender refuses to give you copies of what you are being asked to sign, RUN!

ARM’s, or Adjustable Rate Mortgages, were designed in the 1970’s to help those who might not qualify for more traditional, fixed rate loans. As the years went by, ARM’s got “twisted” until today we have a myriad of loan products with a multitude of features. 

However, all ARM’s have one thing in common – the interest rate “adjusts” rather than stays “fixed” over the life of the loan. So whatever ARM rate your loan agent quotes you, one thing is certain – it will change as the loan matures. How often the ARM rate changes is up to the bank. Some adjust monthly, some yearly. But how much it changes is a function of its index. 

An index, in lending terms, is the benchmark a  lender chooses as a baseline for your loan. In simple terms, it is the wholesale rate the lender pays for money. As the cost of money constantly changes, so too does the baseline interest rate used to calculate your loan payments. This is the component of your loan that “adjusts”. Lenders use different indices. These indices vary in both rate and stability. Some, like the 11th District Cost of Funds, are quite stable, i.e. they move very slowly and in small increments. Some, like the T-Bill Rate, move rapidly. Ask what index your loan is tied to, what that index’s rate is, and how often and how widely it fluctuates. 

The next most important factor affecting your loan rate is the margin. To continue the retail analogy, this is the lender’s profit margin. There is no magic formula for this number. It is simply what the lender feels they need (or can get) to make lending profitable. It is the combination of the index rate (wholesale cost) and the margin (profit) which determines your loan’s interest rate (retail cost). 

Points and fees are the final pieces needed to understand the loan puzzle. Like margins, they are added on as a source of additional profit for the lender. The higher the margin, the lower the points. For example, a lender might offer a loan with a margin of 2.5 and 1 point, or the same loan with a margin of 2.75 and ½ point. Each point equals 1% of the loan amount. 

Fees are also variable. Some lenders charge a separate fee for each service they provide – appraisal, documents drawing, underwriting, etc. Others charge a single flat fee for all these services. What matters is the total cost.  

One last note…most lenders allow for a variety of payment plans on ARM’s. You can chose to pay the fully amortized 30 year rate or the fully amortized 15 year rate. You may decide to pay only the interest. Some lenders even allow you to pay a reduced payment. This usually results in “negative amortization” where the monthly payment is insufficient to cover even the interest due, so the balance is added back on to the loan principal. This will result in a larger loan balance. 

When you are trying to compare ARM’s, be sure to ask about the index, margin, and points and fees. Lending is filled with confusing jargon. Don’t allow a loan agent, using a few unfamiliar terms, to arm-twist you into getting a lousy loan!

Over the years, lending guidelines for the purchase or refinance of a home have become increasingly standardized. For example, credit scores must not exceed specified numbers, and down payments must meet a lender’s minimum criteria. 

All of these come under the heading of “underwriting guidelines”. And one of these is how to calculate the borrower’s “top and bottom ratios”. No, this does not refer to a borrower’s ideal bust and hip measurements. Rather, it is a formula to assess whether or not the borrower can meet their loan payment obligations. If a borrower falls within certain ratios, the lender feels comfortable with the borrower’s ability to repay the loan. Here’s how these ratios are calculated. 

The “top” ratio refers to the monthly cost of running the property divided by the borrower’s monthly gross income. The lender calculates the proposed monthly mortgage payment, adds the monthly property taxes, insurance and homeowner’s dues (if any). This number is divided by the borrower’s gross monthly income and the resulting number is the “top” ratio. 

The “bottom” ratio is calculated the same way, except that, along with the property costs, the lender includes all other regular monthly expenses. This would include such items as child support, alimony, car payments, credit card payments, student loans, boat docking fees, etc. 

Let’s look at an example of how to calculate a "top" ratio. Say a borrower makes $50,000 a year and wants to borrow $100,000 at 7% for 30 years. The monthly payments would be $662. Property taxes and insurance might be $250 per month, bringing the total monthly expense for the property to $912. The borrower’s monthly gross is $4,167, and when that is divided by 912, the result is 22%, well below 28%, the maximum lenders like to see for a “top” ratio. 

Now let’s calculate a "bottom" ratio. To do this, take the "top" ratio expenses and add in other monthly expenses like $300 for credit cards and $175 for a car loan. Add this to the monthly $912, and our borrower now has a projected monthly expense of $1,387. Divide this by the monthly gross and you have a “bottom” ratio of 33% which just meets most lender’s guidelines. 

Many lenders have a variety of loan programs for borrowers who don’t fit into these ideal ratios. But they are generally at less favorable rates and terms. And many of them will be adjustable rate loans, rather than fixed rate. 

While it is still possible to convince an underwriter to consider “extenuating circumstances” when reviewing your loan, more and more, the human element in underwriting is being replaced by cold numbers. The trend in the industry is towards computer programs designed to evaluate a borrower’s credit-worthiness. And though they may be efficient, computers are rarely sympathetic.

Generally, when a borrower applies for a loan, the rate "floats", or moves up or down with market conditions, until the loan is approved. So if rates rise between application and approval, you get the higher rate. Conversely, if rates go down, you get the lower rate. 

If rates are on the rise, a borrower might want to "lock in" their rate early on, before rates go any higher. This is called a rate lock and it can offer a borrower peace of mind. 

Simply stated, when a borrower locks in the interest rate, the borrower gets the rate as contracted, whether rates move up or down. In a climate of rising rates, this can be very appealing. But there are a few things to be aware of before you turn the key on your rate lock.

 Many borrowers believe that, once they lock in their rate, the rate is secure until they close escrow. This may not be the case. Most lenders will lock the rate for 30 days. Unfortunately, the average escrow is 45 to 60 days. So be sure to ask your lender the exact date your lock will expire. 

If your lock does expire prior to closing your escrow, how do you protect your rate until closing? You could delay locking-in the loan by waiting 15 to 30 days after you have a signed purchase agreement. If you suspect rates may drop in the short term, this could be a wise strategy. But in a rising interest rate market, you could end up with a higher rate. 

You could ask the lender to extend the lock-in period. Most lenders will allow this - but for a price, usually a small additional loan fee. You will need to weigh the cost of the extended lock against your guess as to whether rates will go up, down, or remain level. 

Finally, some lenders offer the option that, if you lock in and rates go up, you have the contracted rate. But if rates go down, they will give you the lower rate. This option seems to be getting harder to find, but it's worth asking your lender if they offer it.