FINANCING & MORTGAGES

By Markus Lehmann, Part 2

Coop Financing

Financing a COOP property is more challenging in comparison to financing a property held in traditional ownership.

Many COOP rules require a minimum down payment of at least 20% or 30% of the purchase price - others don't allow financing at all. If financing is not allowed, buyers can only buy the COOP property, if they are able to pay cash and if no financing is involved.

If financing is OK with the COOP rules, then the loan-to-value (LTV) can't be higher than the maximum specified by the COOP bylaws.

This means that if the condo requires a minimum down payment of 20%, the LTV on the mortgage can't be higher than 80%. The buyer can certainly borrow less money because of a higher down payment (lower LTV), but not more than allowed by the coop bylaws.

There is only a limited number of lenders who will give out mortgages for COOP properties.

Most of these lenders require good or, at least, decent credit and a down payment is mostly mandatory, even if the COOP bylaws do not require any down payment at all.

People with challenged credit often have no chance to obtain financing for the purchase of a COOP home. It almost seems as though the sub-prime market (loans for applicants with less then good credit) hasn't discovered COOP financing.

Most lenders like to have the COOP of question on their list of approved properties. If the COOP is not already approved by the lender, then the COOP has to provide certain documentation and fill out a few forms in order to get on this lenders list of approved Coops. This can create a problem, especially if the purchase agreement specifies a closing, which would require funding, within a month or earlier.

Since the approval process also depends on the work speed of the COOP management and the lender, it can take up to month before a coop might get approved with a new lender. Most sellers won't give the buyer that much time to secure financing, so the buyer either has to find a lender who has the COOP on its approved property list or a way to pay cash for the COOP.

One thing that makes many Coops outside of NY so attractive to the buyer, is the fact that they often sell for lower prices then comparable condos. One of the major reasons for the lower prices is that the demand for Coops is lower, because financing is, in some cases, not possible or more difficult to obtain in comparison to a conventional condo.

Financing a pre-construction purchase

Buying a property pre-construction (before the start of construction work) or pre-completion (after start of construction but before finish of construction work) in a hot real estate market is seen as good way of getting a good deal.

Technically, financing the purchase of a brand new property is almost the same as financing an older home.

But here are still a few financing related objectives to consider, before signing a contract for new construction.

Plan far ahead of closing

Between the execution of the purchase agreement and the closing on the new property, there is usually a time gap of many months or sometimes even years.

No developer can give you a firm closing date, because too many unforeseen occurrences can happen during construction and may delay the completion of the project for weeks or months.

If a buyer is planning on financing a new property, it is important to plan ahead as carefully as possible.

The buyer has to make sure there is sufficient cash money (besides the down payment given to the developer by signing of contract) to close on the new property.

For a buyer of new construction it is crucial to know that buying new construction is usually more expansive in closing costs then buying an older structure.

Closing costs are mostly higher because most developers have a stipulation in the purchase agreement which gives them the right to charge a flat closing fee. This fee can be up to 2.5 % of the purchase price in addition to other closing and financing costs.

If the buyer doesn’t have the full purchase price plus the closing cost in cash, then financing should be already in place or the client should at least be pre-approved by a bank or mortgage company before signing the purchase agreement.

When buying real estate with the need of a mortgage, it is highly advisable to make sure there is a finance contingency (check page XYZ for more on finance contingencies), so the buyer is covered in case a mortgage can’t be secured at the time of closing.

If there is no finance contingency in the contract, the buyer has to start very early (one month before the closing) to make sure he can secure financing.

Most developers give buyers of new construction a 14 day notice about the closing date, once the project received its CO - certificate of occupancy (the city confirms the property is in move in condition).

Some buyers make the mistake of waiting with the actual financing process until they received their 14 days notice for the closing date. But it is important to understand that it takes about 4 to 6 weeks from the date of application to have the financing ready for funding.

The best way of avoiding the risk of defaulting on the purchase agreement for delayed closing is to have financing in place before the developer sends out the written notice.

The do’s and don’t for borrowers during loan processing

During the processing of your loan there are certain action by you, which may affect the outcome of your loan application. These remain in effect not only until your loan is approved, but also until your loan is actually funded and recorded. Many times credit, income, and assets are re-verified after you have signed all your final loan documents. It’s highly recommended, that you comply with this list.

MAKE SURE YOU DO NOT:

Quit your current job or get another job unless it is in the same line of work and for equal or more pay.

Always consult with your loan officer before making changes to your work situation.

Allow anyone to make an inquiry on your credit, or apply for new credit.

Change bank accounts or transfer monies within your existing bank accounts.

Co-sign for anyone.

Purchase an auto, furniture, or take out any other new debts.

Charge any additional debt on any current credit.

Start any home improvements that are not a condition of the loan.
Deposit any large amounts of money in bank accounts without being able to source the funds.

MAKE SURE YOU DO:

Keep all accounts current (mortgages, car payments, credit cards, etc).

Keep copies of all paycheck stubs, bank statements, and any bills being paid off with your new loan.

Make payments on all credit on or before the due date, even if the account is being paid off with your new loan.

If you applied for refinancing, continue to make your payments on your existing loan on or before the due date, without exception.

Always call your loan officer if something comes up which may affect your credit rating, income, assets, or if you have any other loan related occurrences.

Appraisals

Whenever third party financing is necessary either to finance a real estate purchase, refinance an old mortgage, or take out an additional mortgage (e.g. second/third mortgage, home equity line of credit etc), the lender wants to get third party opinion of the fair market value of the property.

The estimation of the market value for real estate is usually done by an appraiser.

The appraiser will issue an estimated value which calls the "appraisal".

Appraisers are licensed in most states and have industry standards on how to appraise a property.

Following are three industry standardized approaches in order to obtain a more objective estimate of the value for real estate property.

Market Approach

The market data comparison approach is the most common method used to estimate the market value of residential real estate.

The appraisal using this method is based on recent sales of similar properties in the local market.

The market approach is most reliable when market activity is normal, because the appraiser has to collect information on recent sales on properties similar to the subject property.

These sales are called "comparables" or "comps" and there should be at least three recent closed comparables sales in an appraisal.

Sometimes it's difficult for the appraiser to find recent comparable closed sales in the area of the subject property.

A common misconception of homeowner is, that the value of a property can be determined by what the asking prices of similar properties for sale in the neighborhood are.

The truth is that the appraiser can only use comparables which already closed on the purchase transaction. He CANNOT use the asking prices of pending sales or properties still for sale on the market.

It is most likely that the appraiser won't find 100% similar properties as comparable sales. But the appraiser is able to adjust differences between properties by adding or subtracting money from or to the actual sales price of the comparable, so a fair comparison can be made.

Income Approach

The income capitalization approach is mostly used to estimate the value of an investment property. The method is based on the value of the income produced by the property.

The emphasis is on the financial returns from the property rather than on physical characteristics.

In order for the income approach to be most reliable, the property has to be similar to other income producing properties in the market.

This method shouldn't be used for owner occupied properties.

For income properties, the first thing to find out is the "Net Operating Income" called NOI.

The NOI is converted into an indication of value by applying a capitalization rate, called the CAP rate. The CAP rate is the NOI divided by the sales price.

After calculating and reaching the CAP rate for a property, it's much easier to compare investments properties, even if they are different in size and kind.

The income approach shouldn't be used for owner occupied properties.

The Coast Approach

This approach is usually used to support another appraisal approach, or if the property is new, unique or the market conditions are abnormal.

First the appraiser estimates the cost to exactly reproduce the building at current cost, minus depreciation (if any). The result is the estimated value of the building alone.

The value of the land of the property will be determined by using the market approach.

Now, there is an indication for building and land value and other considerations such as the use of the property, building features, deficiencies and over-improvements can be used to adjust the end appraised value.

The cost approach is more useful for new buildings or proposed new construction, than for older properties with functional or external depreciation.

The cost for a property and the value are almost always not the same.

Knowing your credit score!

Once you have decided to purchase a home or commercial property or to refinance your current property, you should check on your credit scoring. To do so, you need to request a copy of your credit report from the three major credit-reporting agencies (Equifax, Experian and TransUnion). Along with requesting your credit report, you need to let them know that you wish to have your personal credit score included in these reports. Your credit scoring is very important, because it is the key factor that lenders use to determine the interest rate and type of loan programs they can grant you.

Credit Scoring

Credit scoring is a system that creditors are using to help determine whether or not to extend credit to someone. When creditors are deciding whether to give you a loan or not, they look at information which has been gathered about you and your credit history. This information is on file with the major credit agencies. The information that is used to calculate your personal credit score comes from your bill-paying history, the number and type of accounts you have, any collection actions, late payments, outstanding debts, the age of your accounts, the length of your credit history and other factors. Using a statistical program, the credit agencies compare your credit performance with consumers who have similar profiles. The credit scoring system awards points for each factor that helps predict how creditworthy you are – that is, your ability to repay the loan. Credit scores range from the low 300’s to 850 points. The average score range is 620’s – 700’s. Statistically speaking, the lower your credit points, the greater the risk that you will default on payments. Conversely, the higher your credit score, the lower the risk. A low score puts you generally in a higher interest rate category, because lenders charge an extra premium for the higher risk of loan default. This means that people with low credit scores are less likely to take advantage of the low interest rates being offered. If your credit score is below 680 points, you should consider taking action to help increase your credit score so you can get the lowest interest rates for car loans and credit cards and, especially, for mortgages.

How do I improve my credit score?

Generally, your credit score will increase over time as you keep making your payments on time and progressively pay down your debts. As the years go by, any old negative items on your credit report will affect your credit score less and less, and most of them should be deleted by the agencies after 7 years. If you have any negative information on your credit file that is incorrect or just plain wrong, dispute it as soon as possible. Once you dispute information on your credit file (and you have to do it in writing or online), then by law the credit agencies have 30 days to verify your disputed item with the company which recorded the incorrect information.

The credit agency will send you a written notification about the outcome of your dispute and usually they will attach an updated credit report.

Negative information on your credit report (such as late payments, credit lines that are maxed out or over the limit, judgments, collections or bankruptcies) will always negatively affect the scoring from the credit reporting agencies. Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your credit score may change; but improvement generally depends on how that factor relates to other factors considered by the model.

Scoring models generally evaluate the following types of information on your credit report:

-Have you paid your bills on time?

Typically, good payment history is a significant factor in improving your score.

-If you can, make at least the minimum payments required each month and make sure that your creditors receive the payments on time.

-What is your outstanding debt?

Many scoring models evaluate the amount of debt that you have as compared to your credit limits. If the amount you owe is close to your credit limit: that will have a negative effect on your score. You are considered "maxed out".

-Try to keep the balances on your accounts to half or less than your credit limit. This shows that you are able to handle the credit given to you and that you will not go over your limits.

-How old is your credit history?

Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.

-Have you applied for new credit recently?

Many scoring models consider whether or not you have applied for credit recently by looking at “inquires” on your credit report. If you have applied for too many new accounts recently, it will negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at your credit report to make “pre-screened” credit offers are not counted.

-Stop applying for credit for at least 12 months.

-How many and what types of credit accounts do you have?

Although it is generally good to have established credit accounts, too many credit accounts may have a negative effect on your score.

Try keeping the amount of credit you're using in each of your various credit accounts inside their limits. But don’t close existing credit accounts – rather, pay them off and have the accounts active with an unused limit in each of them.

Now that we've seen what credit scoring is and how to improve your credit score, it’s time to get on the phone or on the computer and order your credit reports along with your personal credit score. The sooner you work on your credit history, the faster your credit scoring will improve.

By the way: Refinancing with debt consolidation will usually bring down your revolving debts and, as a result, it may increase your credit score – sometimes dramatically.

So talk to a knowledgeable mortgage broker about your refinancing options.

The three major credit-reporting agencies are:

Equifax: (800) 685-1111 or www.equifax.com

Experian: (888) 397-3742 or www.experian.com

Trans Union: (800) 916-8800 or www.transunion.com/

The Benefits of Owning Your Home

If you are currently renting, you may be wondering if the time to purchase a home is now. Consider these few questions and decide for yourself:

Which option offers a more stable payment and gives you a yearly tax break?

Take a look at the soaring rent prices each year, along with the fact that mortgage interest and property taxes are tax deductible. Mortgage payments are usually lower than a monthly rent within a few years. Also, if you buy a home you can deduct mortgage interest payments; but if you rent, your landlord gets the deductions and uses your rent payment to pay off his mortgage.

Which offers more value and more stability?

When you pay rent each month, you build no equity because the landlord is receiving the payments and uses some towards repaying his mortgage (and he builds equity). When you pay your own mortgage instead of rent, you end up investing some of your money toward repaying your own mortgage (principal payment) and you build your own home equity. Also, your landlord can raise the rent each year, but your mortgage payment amount will remain stable if you choose a fixed mortgage rate. That means your mortgage payment will be the same amount for the next 30 years. Imagine your income increasing every year but your mortgage payments staying exactly the same. Don’t forget, buying a home means nobody can ask you to move out as long as you make all your payments on time. A Landlord can always surprise your with the request of moving out of his property because he changed his plans with it.

Additional advantages of owning vs. renting

Home ownership is a major indicator of financial integrity when it comes to establishing good credit. The mere fact that you have a mortgage will raise your credit scoring. Also, as a homeowner, you can get easier financing, such as home equity lines of credit, which you can use for any purpose. You can pay for a new car or pay off high interest debts with your low interest home equity loan and even deduct the interest from your income taxes. And last, but not least, it’s the American dream to own your own home, rather than renting someone else’s property. In your own home you decide what needs to be improved and changed. You can go and purchase your dream kitchen or that fancy Jacuzzi tub without asking for someone else’s approval…

After all that you are probably asking yourself:

‘But can I afford to purchase a home?’

These days, with low interest rates, you may be pleasantly surprised that most people who are able to pay their rent are also able to finance a home. Even without a down payment, or if your credit file is challenged, you may still qualify for a mortgage.

Consult with a good mortgage broker about your options to finance your own home.

Please remember:

“We are all paying off two homes during our life time and it’s our personal choice if we pay off our own home or the landlord’s property”.

When is the right time to Refinance?

With interest rates being the talk around town, many homeowners are looking into the option of refinancing. But the decision to refinance involves more that just the great rates being offered. There are basically three main factors to consider when making the decision as to whether this is the right time for you to refinance.

Lower Interest Rate

When it comes to refinancing, the rule-of-thumb is that your new mortgage interest rate should be at least 1.5% below your current interest rate in order for refinancing to be worth your while. Along with getting a great low rate, you would lower your monthly mortgage payment. Lower monthly payment would free up your cash flow and could leave something extra in your pocket each month. Let’s assume that your original loan was $100,000 and your interest rate is 8%, with payments of $733.76. If you were quoted an interest rate of 6.5%, your new monthly payment would only be $632.07, which gives you a monthly savings of $101.69. Think about it: Who wouldn’t want a lower monthly payment? Another advantage is that a lower rate would give you the chance to pay off your mortgage sooner.

For example, if you were to refinance your home with a balance of $100,000 at a rate of 6.5% instead of 8%, but keeping your mortgage payment the same as with the 8% interest, you would pay off your mortgage 9 years sooner. Also, keep in mind that the cost of refinancing is about 2-3 % of the loan amount; therefore it would take about 1-2 years to turn the interest reduction into a real saving. Refinancing only saves money if the refinancing is for a mortgage which you plan to keep for at least 3 more years.

Refinancing for Debt Consolidation

Another advantage of refinancing can be debt consolidation through a new mortgage loan, along with cashing out some or all of your home equity. If you are paying high interest rates on credit cards or car loans, or if you have other forms of debt that are not tax deductible, it makes sense to cash out some or all of your home equity. (Home equity is the difference between what you owe the bank on your mortgage(s) and the amount your home is appraised for). Lenders will allow you to borrow up to 100% of the appraised value of your home for cash-out refinance. The amount you can borrow depends on the lender, your credit scoring and your household income. Even if you are able to keep the interest rates on your credit card debts between 6-10%, you should still consider the tax savings you’ll make when you claim the interest payments on your mortgage (but please note: this does not apply to interest payments on credit cards and other debts).

Remove Mortgage Insurance (MI)

If you purchased your home with less than 20% down payment, chances are you have a mortgage that is insured by “Mortgage Insurance” (MI). The purpose of Mortgage Insurance is to protect the lender so that if the borrower defaults on the loan, the lender is able to recover all or most of the money loaned to the homeowner. If your mortgage was higher than 80% of the appraised value at the time you bought your home, it’s very likely you are paying extra money in addition to principal and interest on your loan, to cover the premium for Mortgage Insurance. Refinancing can give you the additional benefit of making MI unnecessary. If your home has increased in value since you bought it, your loan-to-value ratio may now be now less then 80%. Since there is no MI necessary (because your new loan is under 80% of the value of the house), you could end up with additional savings. The premium for Mortgage Insurance varies based on the amount of your loan.

Every Refinancing is Different

Every individual’s loan conditions and interest rates are different, depending on the reason for refinancing. The interest rate that you are quoted is also based on the current market rates and your current credit score rating. The general rule is: The higher the credit score for the loan applicant(s), the lower the interest for the new loan will be. People who have increased their credit score since their last closing can easily bring the interest on a new mortgage down by at least 2% and therefore save substantially. People with approximately the same credit score as when they closed on their old mortgage should consider refinancing because interest rates for your credit score range may have gone down since you closed on your mortgage. The best way for you to find out if you can take advantage of the historically low interest rates is by sitting down with a loan officer of a bank or a mortgage broker.

Please keep in mind that loan officers at banks can usually only offer you their own bank’s loan products. A good mortgage broker, however, is able to choose from hundreds of different loan programs from lenders all over the country. In particular, self-employed people and those with challenged credit or a new employment situation are better served by this wider variety of loans.

________________________

>> Click here to learn more about financing >>