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What Is a Bridge Loan? A Way to Buy a New Home Before You Sell the Old One

July 13, 2019

What is a bridge loan

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What is a bridge loan? As the name suggests, bridge loans offer a short-term loan or “bridge” that allows borrowers to purchase new real estate property by using the home they currently own as collateral. A bridge loan is definitely worth considering for borrowers who are trying to buy and sell a home at the same time.

What is a bridge loan?

Also called a “wrap” or “gap financing,” bridge loans are a lifeline for home buyers who are eager to purchase new digs before they’ve sold the home they’re currently in. In such scenarios, unless you’ve got substantial income and wads of cash for the down payment, it can be hard to qualify for the loan amount of that new home while you are still saddled with monthly payments on the mortgage loan on your current home—for many people, that means stretching their finances awfully thin.

While some lenders may be reluctant to grant borrowers a loan for that new home, lenders also know that the odds are good that the borrower will sell his old house soon enough—and then be flush. A short-term bridge loan helps span that gap.

How bridge loans work

Typically, for a bridge loan, you can finance up to 80% of the combined value of both homes. So if you’re selling a home for $200,000 and buying another one for $300,000, you can borrow $400,000 max. As for the rest (in this case, $100,000), you’ll need that handy either in home equity, savings for a down payment, or some combination of the two. Once your home sells, you pay off the bridge loan and then apply for a new longer-term mortgage with a more favorable interest rate to refinance just your new home.

Bridge loans typically take a shorter time to process than conventional loans (a couple of weeks versus a few months) and are meant to be short-term solutions (often three months to a year). However, since lenders can’t make much money in interest in such a short time, they typically charge borrowers a higher interest rate and fees than lenders would on a standard home loan.

In the current market, lenders charge bridge loan interest rates in the range from 6% to 16%, says Jordan Roth, vice president of GuardHill Financial Corp. in New York City. You may be able to find lenders that offer an interest-only, fixed-rate loan for the length of time you need bridge financing.

With interest rates like that, the idea is to pay the bridge loan off as quickly as possible, as soon as you sell your previous real estate. (That said, some lenders have a prepayment penalty while others don’t, so do make sure to read the fine print.)

Lenders may charge borrowers substantial origination fees on bridge loans—consider it the price you pay for the convenience of getting a short-term loan.

Pros and cons of bridge loans

What is a bridge loan best for? With one of these loans, you can make an offer on a new home without a financing contingency, which means that you’ll buy the home only if you can secure a new mortgage. Odds are, the person selling the home you hope to buy doesn’t like financing contingencies, since that would mean that your offer is not a sure thing. A bridge loan solves this home-buying problem by guaranteeing the cash needed to close the deal.

Still, bridge loans are rare—requiring an excellent credit score and a low debt-to-income ratio—and you should take time to consider “what is a bridge loan going to do to my long-term finances?”

Even if you’re fairly certain you’ll sell your current home quickly and can pay off this high-interest loan, the real estate market is never a sure thing, and there’s always a possibility that your old home will take far longer to sell than you imagine—or, God forbid, your old home will never sell at all. Then you’re stuck paying high interest rates and big mortgage payments—and if you can’t pay up at the end of the loan term, you could end up losing your home to foreclosure. Granted, most bridge loan lenders are willing to extend the deadline on a bridge loan, but not forever.

Is a bridge loan right for you?

Whether you should get a bridge loan or not “depends on the market you’re in,” says Steve Goldman, a real estate partner with Kurzman Eisenberg, Corbin & Lever, in White Plains, NY.

As a general rule, it’s a good gamble if your home is situated in a hot seller’s market, where you are reasonably assured that it will sell in a short time.

“If you’re in a seller’s market, it’s generally fine to buy a new house, then sell your old one,” says Goldman.

However, if you’re in a buyer’s market, where your home might sit on the market for months or years, it’s much wiser to sell your house and rent something for a short time until you find another home you love. Yes, that means you’ll have to move twice—once into your rental, then once again after you buy a home—but that hassle will pale in comparison to the stress you’ll face when the clock is ticking and you’re making mortgage payments on a bridge loan. So make sure you’re a good candidate before you go out on this limb.

The post What Is a Bridge Loan? A Way to Buy a New Home Before You Sell the Old One appeared first on Real Estate News & Insights | realtor.com®.

How to Get a Mortgage: A Step-by-Step Guide for Home Buyers

July 11, 2019

how to get a mortgage

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If you want to buy a house but don’t have oodles of cash lying around, you’ll need to learn how to get a mortgage—that all-important home loan used to purchase property that you will then pay back for years or even decades to come.

The vast majority of home buyers need a mortgage to achieve their dream of homeownership, but that doesn’t mean lenders just hand out loans to everyone who asks. There’s a process, with requirements you’ll have to meet. So before you even set foot in a home, make sure you know the steps on how to get a mortgage so you can secure a loan without a hitch.

Step 1: Shop for a mortgage

Before you start shopping for homes, you should shop for a mortgage. Many first-time buyers wait until they’ve found the perfect home to start shopping for a mortgage and looking at mortgage rates—and that’s a mistake.

The reason: All lenders are a little bit different, so it pays to compare the loans they’re offering in terms of interest rates, closing costs, and more, says Richard Redmond, a mortgage broker and author of “Mortgages: The Insider’s Guide.”

This is a good time to decide whether you want to apply for a fixed-rate or adjustable-rate mortgage loan.

This step will also help you pinpoint any concerns lenders might have with your loan application, and give you time to fix these flaws so you’re in great shape to make an offer once your dream home does come along.

You’ll also want to check your credit report before you go much further. If your credit score is less than excellent, or even if you have bad credit, you have work to do before you can qualify for a loan with a favorable interest rate. You can take some steps (e.g., paying down loan amounts and possibly increasing credit card limits) to improve your credit score quickly. If your credit report shows more problems, however, you may need to spend several months to a year working on your credit score before you try again to get a mortgage.

Step 2: Get mortgage pre-approval

The goal of meeting with a mortgage lender is to get pre-approved for a mortgage. During this process, the lender will probe your financial past and check out your income, debts, and other factors that help it determine whether or not to give you a home loan—and how much house you can afford to buy.

Getting pre-approved is critical if you want your home-buying efforts to succeed. Why? Because a pre-approval letter from a lender shows home sellers that you have the financial backup necessary to buy their home. Without it, sellers have no guarantee you can afford their place and, in many cases, won’t take you seriously.

Don’t confuse pre-approval with getting pre-qualified. To pre-qualify, a borrower basically has a conversation with a lender about finances, but the borrower doesn’t need to provide any paperwork.

“A pre-qualification can be drafted on a piece of loose-leaf paper,” says Ray Rodriguez, regional mortgage sales manager at TD Bank. “It often holds no value.”

To apply for pre-approval, you’ll need to provide a lender with the following:

  • Pay stubs from the past 30 days showing your year-to-date and monthly income, or business profit and loss if you are self-employed
  • Two years of federal tax returns
  • Two years of W-2 forms from your employer
  • 60 days or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts such as CDs, IRAs, and other stocks or bonds
  • Any other current real estate holdings
  • Residential history for the past two years, including landlord contact information if you rented
  • Proof of funds for the down payment, such as a bank account statement (If the down payment cash is a gift from your parents, “you need to provide a letter that clearly states that the money is a gift and not a loan,” says Rodriguez. Otherwise, the money for the down payment affects your debt-to-income ratio, and can prevent you from getting the mortgage loan.)
  • A mortgage application
  • Permission to check your credit report and pull your credit score (Your credit history shows your history of making mortgage and credit card payments, and borrowing other money and paying it back responsibly. Your report also shows open debt accounts you may have, including student loans, credit cards, and other debts. Even if you have a good credit score, if you have too many debts, your debt-to-income ratio may be too high to qualify for the monthly payments on your new loan.)

Step 3: Get a home appraisal

After you’ve made an offer on a home and signed a sales contract, most lenders will want to check out what you’re buying with their loan proceeds—and size it up for themselves with a home appraisal. This means a home appraiser will assess the market value of the house using comparable homes, or comps, much like you and your real estate agent did when coming up with how much to offer on the home.

Most times, the appraiser’s price will end up approximately the same as your own—in which case all is good, says Rick Phillips, an appraiser and real estate agent in Vienna, VA. And if the appraisal comes in higher than what you’re paying, you’re getting a good deal. For example, if you’re paying $700,000 for a home and the appraiser says it’s worth $710,000, you’ve instantly gained $10,000 in home equity.

However, if the loan appraisal comes in lower than what you’ve agreed to pay for the home, that can be trouble, because lenders will loan you only as much money as the assessment says it’s worth, or up to a percentage of the assessment. That means you’ll have to pay the difference between the maximum loan amount and the purchase price plus closing costs—or persuade the seller to lower the sales price to what the lender thinks is fair. Another option is to challenge the loan appraisal by either filing an appeal or ordering a second loan appraisal. In most cases this all works out—and if it doesn’t, keep in mind your lender is essentially keeping you from overpaying for a dud.

Step 4: Clear the property title and close the deal

When you buy a home, you “take title” of the property—meaning you become the rightful owner. And your lender wants proof! As such, it’ll ask for a title search, which involves paying a title company to search public records for any heirs insisting the property is theirs, liens (from contractors who worked on the home but were never paid), or other problems. Hopefully all goes well, but in case not, this extra step could save you from a seriously scary situation where you’re fighting for ownership, or responsible for paying back old liens yourself.

Once the title is cleared, you can close the deal. That’s where buyer, seller, lender representative, and any others involved in this process meet to sign all of the paperwork, transfer all money owed, pass along the keys, and move on with their lives!

Sure, the whole mortgage process may sound time-consuming and complicated, but rest assured its purpose is to protect all parties, including you, from making costly mistakes.

The post How to Get a Mortgage: A Step-by-Step Guide for Home Buyers appeared first on Real Estate News & Insights | realtor.com®.

The Earnest Money Deposit: How It Helps Buy a Home

July 4, 2019
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What is earnest money? Depositing earnest money is an important part of the home-buying process. It tells the real estate seller you’re in earnest as a buyer, and it helps fund your down payment. The earnest money check is typically cashed and held in a title company trust account, or in the broker’s escrow account. You get a receipt from your brokerage when you hand in the earnest money.

Without the requirement of earnest money, a real estate buyer could make offers on many homes, essentially taking them off the market until they decided which one they liked best. Sellers rarely accept offers without the buyers putting down earnest money to show that they are serious and are making the offer in good faith.

Assuming that all goes well and the buyer’s good-faith offer is accepted by the seller, the earnest money funds go toward the down payment and closing costs. In effect, earnest money is just paying more of the down payment and closing costs upfront. In many circumstances, buyers can get most of the earnest money back if they discover something they don’t like about the home.

How much should you put down in the earnest money deposit?

The amount you’ll deposit as earnest money will depend on factors such as policies and limitations in your state, the current market, what your real estate agent recommends, and what the seller requires. On average, however, you can expect to hand over 1% to 2% of the total home purchase price.

In some real estate markets, you may end up putting down more or less than the average amount. In a market where homes aren’t selling quickly, the listing agent may note that the seller requires only 1% or less for the earnest money deposit. In markets where demand is high, the seller may ask for a higher deposit, perhaps as much as 2% to 3%. Your real estate agent may recommend that you are more likely to win a bid if you give the seller a large deposit. In fact, the seller may be willing to negotiate on the purchase price a little if you make a bigger good-faith deposit.

On the other hand, you may not want to put too much earnest money down. Coming up with that much money, and losing the use of it for weeks or months before the sales contract closes, may not be the best use of your cash.

However, you may wind up having to do some paperwork for your mortgage lender, and the bank may want to verify the source of the funds for larger deposits of earnest money. It won’t be a problem if you can show that you’ve had the money for at least 60 days.

When do you make an earnest money deposit, and who holds it?

In most cases, after your offer is accepted and you sign the real estate purchase agreement, the contract stipulates that you give your deposit to the title company. In some states, the real estate broker holds the deposit.

Always check the credentials of the title company or real estate broker taking the deposit, and verify that the funds will be held in escrow. Never give the earnest money to the seller; it could be difficult or impossible to get it back if something goes wrong.

After turning over the deposit, the buyer’s funds are held in an escrow account until the home sale is in the final stages. Once everything is ready, the funds are released from escrow and applied to your down payment.

Can you get your earnest money deposit back?

If the deal falls through, a small cancellation fee is usually taken out of your earnest money deposit, but the remainder remains in escrow. Whoever holds the deposit determines whether you should get the earnest money back under the terms of the purchase and sale contract. Make sure that the purchase agreement covers how an earnest money deposit refund is handled.

To be on the safe side, make sure the purchase agreement contains contingency addendums that stipulate how a refund is handled (e.g., an inspection contingency protects the buyer if the real estate fails a home inspection). Buyers can also usually get their earnest money back if they find problems with the property, or if they are unable to get title insurance.

A financing contingency ensures that the earnest money is refundable and the buyer can get out of the transaction if he cannot get financing. Keep in mind that a pre-approval from a lender does not guarantee a borrower can get a loan at mortgage rates he can afford. Even if a buyer has a good credit score and is pre-approved for a mortgage loan, the lender can still turn him down  based on unforeseen factors such as the appraisal amount being too low. In such cases, a standard contingency allows buyers to renegotiate the purchase contract, or get their money back.

Updated from an earlier version by Laura Sherman.

To learn more, head to realtor.com/mortgage

The post The Earnest Money Deposit: How It Helps Buy a Home appeared first on Real Estate News & Insights | realtor.com®.

Should You Refinance Your Mortgage? A Homeowner’s Guide to HELOCs and More

July 2, 2019

Refinancing a mortgage can be a great way for homeowners to save some money. But beware—make a wrong move when you refinance a loan, and you could easily get in over your head. That’s why we highlight here the right (and wrong) ways to refinance your mortgage loan.

What is home equity?

Your home equity is the current market value of your home, minus the amount you owe on your mortgage. While paying down your mortgage loan will decrease your debt and increase your home equity, the value of your home can rise (or fall) and increase (or decrease) your home equity, too. (Here’s how you can get an estimate of how much your home is worth.)

What is a refi?

When you refinance your mortgage, you’re essentially applying for a new loan. Once again, you’ll be subject to complete documentation and verification of your income, assets, debt-to-income ratio, credit score, and job history. Your real estate property will need to appraise for enough value to support the mortgage refinance, and you’ll have to show that you can afford the new monthly payments on the mortgage.

You will also need to either pay closing costs on the loan, which run anywhere from 2% to 7% of the amount of the mortgage, or opt for a no-cost refinance, where your lender covers the closing costs but you get a slightly higher interest rate on your new loan.

A mortgage refinance can be for the amount you currently owe on your mortgage, or it can be for more or less money. If you have extra cash and want to reduce your mortgage balance, putting money with your refinance is a good idea. The lower your new loan amount, the less you’ll pay in loan origination fees and interest. On the other hand, if you get a cash-out refinance, you can get a check at closing.

Whether you use the same lender for a mortgage refinance is entirely up to you, says Jordan Dobbs, a loan officer at Washington First Mortgage in Rockville, MD. Even if you were happy with your current mortgage lender, it could be beneficial to shop around and compare your loan options with different lenders.

4 reasons refinancing a mortgage can work

There are several things that could prompt you to refinance your loan:

  1. To get a lower interest rate. Many people decide to refinance a mortgage when mortgage rates are lower so that they can lower their monthly payments and, consequently, pay less in interest over the life of the loan. You may also qualify for a lower interest rate now than you did when you took out your mortgage (e.g., if your credit score has improved). If that’s the case, you’d want to look at your potential closing costs and calculate your break-even point to determine whether it makes sense to refinance, since you’re also resetting the clock in terms of the life of your mortgage. You can use realtor.com®’s refinance calculator to crunch the numbers of your own mortgage and see how much you’ll save on your monthly mortgage payments if you refinance at a lower interest rate. (One rule of thumb says that if your interest rate is more than 1% above current mortgage rates, deciding to refinance is a smart move.)
  2. To get a different type of mortgage. Some borrowers want to refinance an adjustable-rate mortgage into a fixed-rate loan, while others want to reduce their loan term from a 30-year loan to a 10-, 15-, or 20-year loan in order to pay it off faster and save money in interest payments over the long haul.
  3. To stop paying private mortgage insurance (PMI). If you didn’t have enough cash to make a 20% down payment when you purchased your home, your lender likely required you to get mortgage insurance—a monthly premium that typically costs between 0.3% and 1.15% of your home loan and is included in your monthly payment. If you refinance to a loan without mortgage insurance, you can save hundreds of dollars each month in your mortgage payment, but you’ll need to have at least 20% equity in your home to qualify, says Dobbs.
  4. To tap into the home’s equity. People also refinance a loan because they want to take cash out of their real estate, which is often done to make home improvements, pay for college, consolidate debt, or make a down payment on a second home. If you decide to go that route, you can choose between a cash-out refi and a home equity line of credit (or HELOC). Be aware that a cash-out refinance increases the size of your loan amount over your previous balance on your original mortgage loan. A one-time mortgage refinance may be a good strategic move if the monthly payment does not adversely affect your cash flow and financial goals. However, repeated mortgage refinances every few years will put you further in debt and extend your loan term, making it difficult to ever pay off your loan balance.

What’s the difference between a home equity loan and a HELOC?

Although these two loan products sound similar, they’re significantly different. With a home equity loan, you decide how much you want to borrow against your real estate and then make monthly payments, similar to a regular mortgage. Thus, with a home equity loan you avoid the temptation to overspend, because you’ll be borrowing a set amount. Also, because the interest rate is usually fixed, you have peace of mind knowing that the payments will remain the same.

A home equity line of credit, or HELOC, meanwhile, functions more like a credit card, because it allows you to borrow up to a certain amount (typically 75% to 85% of the appraised value of the real estate, minus what you still owe) on an as-needed basis over the term of the loan (usually five to 20 years). In fact, your lender will actually issue you a plastic card that you can use to access the money easily. A HELOC works well if you want to borrow money but don’t know exactly how much you’ll need (a common conundrum when making home improvements).

The main drawback to HELOCs? Unlike with home equity loans, interest rates on HELOCs are variable, which means they fluctuate depending on market conditions. And while many lenders offer a low “introduction” rate, it lasts only for a matter of months; after that, the interest rates will adjust—and continue to readjust—which could create problems if you don’t prepare for the potentially higher payments. So be sure to weigh these pros and cons before you start chipping away at the real estate equity you’ve gained.

The post Should You Refinance Your Mortgage? A Homeowner’s Guide to HELOCs and More appeared first on Real Estate News & Insights | realtor.com®.

7 Myths About Going Through Foreclosure to (Hopefully) Ease Your Mind

June 28, 2019

If you are a homeowner, the word “foreclosure” can strike fear deep into your heart, conjuring up scenarios of the bank kicking you out of your home and damaging your credit so you’ll never be able to buy another home.

But here’s a reality check: Yes, foreclosure is a soul-crushing process. When an owner is unable to pay the mortgage, the lender, to recoup some of its costs, assumes ownership and tries to sell the home. But few people are really familiar with how it all goes down—and so a lot of what you think you know about the foreclosure process is a myth.

We’ve rounded up the top misconceptions about foreclosure below, in the hope that they’ll help you breathe a little easier.

Myth 1: The bank wants to take your house

“The bank absolutely doesn’t want your home,” says Kyle Alfriend of The Alfriend Real Estate Group, in Dublin, OH.

Yes, the bank you have a mortgage with has a legal obligation to do everything within its power to get back the money still owed to it. “But taking your home is their absolute last option,” he says.

In fact, a bank would prefer anything over foreclosure. Why? Banks are in the business of collecting interest on loans, not owning homes. And the losses to a bank foreclosing on a property are enormous compared with other loss mitigation techniques.

This all means that banks are often open to discussing reasonable alternatives to foreclosure such as loan modification, forbearance, or a short sale.

“The key is to talk to the bank; don’t hide from them and don’t avoid their calls,” says Alfriend.

Just keep in mind that banks have to deal with regulations, too. If they shut down one request, keep talking to them about other options.

Myth 2: You can’t refinance with another lender

You can certainly try to refinance—which means you’ll take out a new loan to pay off the existing mortgage—to stop the foreclosure.

“These loan options are typically at higher rates, and you will need to evaluate the pros and cons, but options do exist,” says Alfriend. You will need to have a stable income and equity in the home to qualify for a new loan.

“If you can’t find a traditional lender, you likely need to find what is called a hard money lender,” says Ed Kaminsky, a real estate agent at Strand Hill Christie’s International Real Estate in Redondo Beach, CA. This option makes sense only if the equity in your home is more than the cost of refinancing.

Myth 3: Once foreclosure starts, you can’t stop it

In reality, you can try to stop foreclosure up to the moment that your home goes up for public auction at the county courthouse steps, which is the final step in a foreclosure process.

“If you reach the trustee handling the foreclosure and make up all of your back payments prior to that, you can save your home,” says Kaminsky. Again, this is a situation in which you should work with your lender to figure out your options for repayment.

Myth 4: You’re kicked out of your home immediately

Missing a couple of mortgage payments or receiving word from your lender is cause for concern, but don’t jump to the conclusion that you’re going to be evicted immediately. Owners have the legal right to remain in their home until the foreclosure process is completed. And sometimes, lenders will let you stay longer.

“About seven years ago, my first home was foreclosed on,” says Becky Beach of MomBeach.com. Beach lost her job and had no other income to pay the mortgage. “But the bank—Bank of America—let me stay in the home for a year.”

After a year, the bank told Beach she had to vacate the property within a three-month period. After that time period expired, Beach still needed some extra time in the home. “And the bank let me stay an extra month after I spoke to a manager,” says Beach.

“Most of the time the bank will extend the foreclosure process multiple times if you give them a valid reason to do so,” Kaminsky says.

Myth 5: Foreclosure ruins your credit for life

The foreclosure will live on your credit report for at least seven years. But you should be able to borrow again once you prove that you are creditworthy.

You can reestablish good credit two to four years after your foreclosure by regularly paying off a credit card or a higher-interest car loan.

“After seven years, my credit is nearly perfect,” says Beach. “And there’s no record on my credit report about the foreclosure.”

Myth 6: You’ll never be able to buy another house

Sure, your chance of getting a loan at the lowest possible interest rate is likely off the table for several years, depending on the circumstances of your foreclosure. But you can certainly buy another home.

“It’s a myth that foreclosed people can’t get another home,” says Beach. After finding a new job and saving for four months, she was able to put a down payment on another house.

“Now I live in a new $250,000 home,” says Beach.

Myth 7: Foreclosure is always a bad idea

In some cases, it can make sense to let the foreclosure happen and reset your financial life.

“This is if you have little to no equity or even negative equity in the home,” says Kaminsky.

In this case, readjusting your priorities on where you put your money is something that should be considered.

The post 7 Myths About Going Through Foreclosure to (Hopefully) Ease Your Mind appeared first on Real Estate News & Insights | realtor.com®.

What Is a Hard Money Lender? It’s Not as Scary as You Might Think

June 22, 2019

What Is a Hard Money Lender

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What is a hard money lender? The real estate term may conjure up visions of crooked-nosed guys who’ll cut off a borrower’s pinkie finger for flaking on a hard money loan. But you can rest assured that, despite the “hard money” moniker, these professionals aren’t thugs. In fact, these lenders fill a legitimate niche in the housing market for quick, asset-based home loans. And they loan money for massive real estate investments and regular homes alike.

What is a hard money lender?

There are many types of money lenders. To understand “what is a hard money lender,” it’s important to know what a hard money loan is: It’s simply a short-term loan secured by real estate.

Back to the question of who and what a hard money lender is: “It’s synonymous with a private investor,” says Don Hensel, president of North Coast Financial, which specializes in hard money loans. “A lender could be an individual, a group of investors, or a licensed mortgage broker who uses his own funds. This differs from a bank that uses money from its depositors.”

Benefits of a hard money loan

Why would any potential borrower opt for a hard money loan from a hard money lender instead of getting a mortgage through a traditional loan from a bank? Because hard money loans are generally less of a hassle than those from traditional lenders, especially when it comes to real estate investments. The flip side? Hard money loan rates are much higher, and you borrow the money for only a short period of time.

Hard money lending is especially popular for the following people:

Flippers: If a house in disrepair comes on the market and it looks like it could be fixed and flipped in several months, most borrowers prefer not to go through the hassle of taking out a 15-year loan on the property. Instead they take out a fix-and-flip loan, aka a hard money loan, to buy and renovate the investment property with an aim to repay the lending party for the money loan within one year.
Builders: Many contractors use hard money to buy a lot, build on it, and then sell the new real estate and pay off the loan quickly.
Real estate investors: On occasion, a real estate investor will come across a killer deal on a property that needs to be snapped up pronto. If the real estate investor doesn’t have the money on hand to snag the asset, a loan that’s short-term can be fast-tracked by a hard loan lender, who is, in effect, a real estate investor as well.
People with credit issues: Borrowers who have cash on hand for a down payment for what will likely be an owner-occupied home but have been rejected by a bank for a conventional loan—or have had a foreclosure, default, low credit score, or other red flag on their recent credit report, but have some cash on hand—can use hard money to buy a property that would be unavailable to them otherwise.

So let’s say you lost your job several years ago and your house went into foreclosure. Since then, you’ve found a great position and are happily employed. You’ve also found a killer deal on the perfect real estate, but there’s a problem: Few banks will grant you a mortgage with a foreclosure on your record.

Chances are you can find a lender who works with hard money who will give you the opportunity to buy that real estate before it slips away. You can then refinance with a traditional mortgage once time has passed and your credit score improves.

“The higher interest rates may seem scary at first, but the benefits of getting a loan funded quickly and being able to obtain financing when all the banks have said ‘No’ will far outweigh the extra cost,” says Hensel.

The closest thing banks have to a hard money loan is a bridge loan, but qualification for one may be more difficult.

How borrowers get a hard money loan

To find hard money lending options and explore hard money loan rates, ask your Realtor® for suggestions. You could also check Biggerpockets.com‘s directory of hard money lenders across the U.S. But first, you should know how they work.

The loan terms for hard money are usually much shorter; from six months to one year is most common, but sometimes they can go up to five years. And, as you would expect, interest rates are considerably higher, usually ranging from 12% to 21%. Most lenders of hard money also charge points upfront in addition to high interest rates, where 1 point equals 1% of the loan. From 3 to 6 points is typical for a hard money loan.

So if you borrow $100,000 from a hard money lender, you would pay $1,000 per point charged, which would likely be an extra $3,000 to $6,000 upfront, in addition to the interest you’ll be paying until the end of the loan.

Down payment requirements on real estate for hard money loans are also different. You can expect to receive about 60% to 75% of the property value you intend to purchase. If you’re looking at a $200,000 property, for example, the most you’ll probably be allowed to borrow would be $150,000, meaning you’d have to pay $50,000 upfront.

On the other hand, because you’re not doing all of the paperwork and extensive qualifying procedures required by big banks, you can usually get a hard money loan much faster. In many cases, it could take as little as one week.

Risks of a hard money loan

Once you can answer “what is a hard money lender,” you might be tempted to contact one. But you should use caution if you decide to go the hard money route. Make sure you take the time to look into the reputation of the hard money lender, and have an experienced real estate attorney review the paperwork. While there are many legitimate lenders of hard money offering loans, there are also predatory ones who try to take advantage of borrowers.

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Giving—or Receiving—a Down Payment Gift? Here Are the Tax Consequences

June 7, 2019

gawriloff/iStock

Searching for homes and scrolling through listing photos is fun, but saving up for a down payment can be a real challenge. That’s why some home buyers turn to family for a helping hand in the form of the gift of a down payment. But whenever a large stack of cash changes hands, Uncle Sam wants to know—and that means tax returns can get complicated. So before you give or get a down payment gift, make sure you understand their tax implications.

Who can give you a cash gift for a down payment?

If you’re buying a home, you can only use a cash gift from an immediate relative to help get a mortgage to buy a home. That means a parent, grandparent, sibling, or spouse. It’s also generally acceptable to receive gifts from a domestic partner, or significant other, if you’re engaged to be married.

“Keep in mind you will have to provide detailed documentation in the form of a gift letter to the lender that states the name of the donor, their relationship to you, the date and amount of the gift,” says Jennifer Harder, founder and CEO of Jennifer Harder Mortgage Brokers. You’ll also need a statement from the donor that the money was given with no expectation of repayment.

And watch out for this important condition: The general rule is, if you are putting a down payment of 20% or more, it can all be gifted money. But if your down payment is less than 20%, some of that needs to come from your own pocket.

How much of a tax-free gift can you give?

Any one person can give a gift of $15,000 or less to another individual and not have to pay taxes on it.

Here’s an example of how families can amass a bigger gift under that regulation: Each member of a couple trying to get help with a down payment can receive $15,000 from each parent. So Mom gives $15,000 to her daughter and $15,000 to her son-in-law, and Dad does the same. That means that one set of parents could give the couple a total of $60,000 tax-free. And then the husband’s parents could do the same.

“All that’s required is that it is a gift, meaning it’s made with disinterested generosity,” says Ann Brookes at Taxattorneyatlaw.com.

“The beauty of the gift tax is that any amount received that’s beneath the current $15,000 exclusion amount is not taxable to anyone,” says tax expert and CPA, Folasade Ayegbusi of accountingwithfolasade.com. She used the gift tax strategy to purchase her first home.

“I received a $10,000 gift and used it as my down payment,” she says.

What if the down payment gift is above $15,000?

Down payment amounts above $15,000 and received as a gift must be reported on a gift tax return by the person making the gift—not the beneficiary. But that doesn’t mean the donor will pay taxes.

“The gifts get tallied up over time and offset against the lifetime exclusion on gifts, which is currently $11.4 million,” says Brookes. “The purpose of filing the return is to track your lifetime gift amount, which will be used in calculating tax on your estate when you die.” If you give more than $11.4 million while still alive, the gift tax rate kicks in, which can be anywhere from 18% to 40%.

What if you don’t report the down payment gift?

There is generally a three-year statute of limitations on filing a gift tax return, although that doesn’t begin until a return is filed. If you do not file the gift tax return within that period, “the IRS can assess a gift tax, in addition to penalties and interest, on a reportable gift that was not adequately disclosed to the IRS on a return, years—even decades—after the gift was made,” says tax attorney Jennifer Correa Riera of Miami’s Fuerst, Ittleman, David & Joseph.

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4 Good Reasons to Not Get a Mortgage Online

May 14, 2019

cnythzl/iStock; realtor.com

Applying for a mortgage these days can be accomplished entirely online—no need to schlep to a bank and suffer hand cramps filling out paperwork.

Instead, you can punch some basic info into an online mortgage site, and up pops a bunch of loan choices. An industry renowned for being slow and cumbersome is now wooing customers with the promise of ease, speed, and transparency. Rocket Mortgage, Quicken Loan’s online platform, for example, promises qualified customers approval in as little as eight minutes.

But taking out a six-figure loan is one of the most complicated and substantial financial transactions most people will ever make. Does it really make sense to handle it by pushing a few buttons on your smartphone?

Maybe for those with a typical 9-to-5 job and good credit.

“If you are a salaried employee with no overtime, no bonus—no funky income, if you will—just a plain-vanilla borrower, then sometimes the online mortgage does work,” says Brian Minkow, a divisional vice president and loan originator at Homebridge Financial Services, a non-bank lender. “You know: You have a five-year work history, you’re putting 20% down, and have an 800 FICO score.”

But then there’s everybody else.

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Watch: How Long Does It Take to Improve Your Credit Score Enough to Buy a Home?

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Here are some of the many reasons why those borrowers might consider taking more time with the process, including consulting with an experienced loan officer or mortgage broker.

1. You want to shop around for the best loan

First and foremost, it’s always in a borrower’s best interest to comparison shop on rates and fees, says Keith Gumbinger, a vice president at HSH.com, a mortgage information website. Speed and convenience alone do not always translate into a better price for borrowers.

“You should invest some time in it, do your research,” Gumbinger says. “Also, do your diligence on your credit. And think about how long you’re going to be in your home.” The reason? The length of time you estimate you are likely to be staying in the home can be a factor in whether you apply for a fixed or adjustable rate loan.

Gaining an understanding of different loan programs is a smarter approach than just “going online and filling out things,” says Minkow. “A lot of people really don’t know if they’re getting the right loan program, the right interest rate, the right down payment.”

The research process may ultimately lead you straight to the speedy online mortgage site as the best option anyway. But, Gumbinger says, “You won’t know that unless you go out and take a look around.”

2. You’re a first-time home buyer

Researching all your options is especially important if you’ve never purchased a home before, advises David Weliver, founder of MoneyUnder30.com, a personal finance advice site. First-time buyers should always talk through important details like rates, points, and closing costs with an expert. “After you’ve been through the process once, you have a better idea of what to expect and what information you’ll need to provide to make the process go smoothly,” he says.

Even those who have borrowed before may want to consult with someone if there is anything about their circumstances that might make qualifying more difficult. For example, Weliver says, “a real person could be a helpful advocate” for borrowers who are buying a second home or rental property, have spotty credit, or have inconsistent income.

3. You’re self-employed

About 15 million Americans are classified as self-employed, according to the Pew Research Center. While salaried workers generally only have to show the lender their W-2 tax forms to prove their income, self-employed workers “should expect that they will have to provide the lender with more income documentation, such as tax returns from the last few years,” Weliver says.

The fact is, some online lenders are more strict about documentation requirements than federal guidelines require, because they want to reduce their risk, says Minkow. That can make qualifying even tougher for a borrower who is already perceived as a higher risk—for example, applicants who have only been in their current job for a few months, or those who want to include overtime pay as evidence of their buying power. The lender will want to see proof that the overtime pay is consistent. “Certain guidelines say you have to show you have it for 12 months or 24 months—it depends on the loan,” Minkow says.

4. You want some extra handholding

Working with someone one on one may also help prevent last-minute problems when it comes time to buy that house. “I can’t tell you how many clients who have come to me after they’d gone online and gotten a pre-approval from a lender,” Minkow says. “Then they go to purchase a house, and halfway through the transaction, the online lender says all of a sudden, ‘You can’t get approved.’ The client freaks out. And that’s when they get ahold of someone like myself.”

Finally, there is the matter of personal preference. Not everyone likes the impersonal approach. Before applying for a loan, borrowers might consider whether they are the kind of person who appreciates a lot of help and attention in other shopping experiences. “If you like a hands-on environment, like a Macy’s, you’re a different kind of shopper than someone who enjoys going to a warehouse club,” says Gumbinger. “Your expectations going in will influence how satisfied you are with the process.”

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Who’s the Best Mortgage Lender for You? How to Find Your Match

April 23, 2019

Mortgage Broker

iStock/fizkes

Most house hunts involve not only finding your dream home, but also selecting the best mortgage lender to finance this massive purchase.

So what do we mean by “best”? A mortgage with a low interest rate and fees, obviously, but it’s more than just the money. Ideally you want a mortgage lender who won’t leave you buried in paperwork, or confused by a slew of obscure terms you don’t understand.

In a recent survey, about 1 in 5 U.S. home buyers said they came to regret their choice in a lender. Don’t want to be one of them? Then be sure to ask yourself these questions below to home in on your perfect match.

How much money do I need?

A mortgage is by no means a one-size-fits-all product. Indeed, your budget plays a significant role in what lender you should choose.

If you’re looking to get a big loan, you’ll want to search for a lender that specializes in jumbo loans. In a nutshell, these are mortgages that exceed the loan limit of conforming loans, which is $424,100 in most areas. If you live in a high-cost area, the conforming loan limit is $636,150. But, after the housing crisis, many mortgage lenders pulled out of the jumbo loan market. After all, extra-large home loans pose a greater risk to the lender.

To get a ballpark figure of how much money you need—and the type of house you can afford—plug your income and other numbers into an online home affordability calculator.

Would I qualify for a conventional loan?

Most home buyers obtain conventional loans, since these mortgages tend to offer the lowest interest rates. But in order to qualify for a conventional mortgage, borrowers need to meet certain requirements—like, for instance, a credit score of at least 620, a down payment of 5% to 20%, and a maximum debt-to-income ratio of 43%, says Todd Sheinin, mortgage lender and chief operating officer at Homespire Mortgage, in Gaithersburg, MD.

The DTI ratio is how much money you owe in monthly debt obligations (on student loans, credit cards, car loans, and hopefully soon a home loan), divided by your monthly income. So, let’s say you’re paying $500 to debts and pulling in $6,000 in gross (meaning pretax) income. Divide $500 by $6,000 and you’ve got a DTI ratio of 0.083, or 8.3%. However, that’s your DTI ratio without a monthly mortgage payment. If you factor in a monthly mortgage payment of, say, $1,000, your DTI ratio increases to 25%.

If I don’t quality for a conventional loan, what are my options?

Most home buyers who don’t qualify for a conventional loan do still qualify for other types. The main options include FHA loans, VA loans, and USDA loans. Generally the requirements for these are looser—meaning lower down payments, lower credit scores, and higher DTI ratios. However, they still have their limits.

Federal Housing Administration loans, for example, let home buyers put down as little as 3.5%, but borrowers generally need a minimum credit score of 580, says Tim Lucas, editor at MyMortgageInsider.com.

Meanwhile, U.S. Department of Agriculture loans let borrowers put as little as 0% down, but these loans are available only in certain rural locations.

Veterans Affairs loans also require no money down, but are available only to veterans, active-duty service personnel, and select reservists or National Guard members. If you quality for these loans, they’re great options.

Am I willing to hire someone to do the legwork?

To find the best mortgage lender, it’s essential that you shop around. However, there’s one alternative: Hire someone to do the shopping for you.

You can do this by hiring a mortgage broker—an industry professional who can shop for multiple lenders simultaneously on your behalf. The caveat: Sometimes mortgage brokers get their commission paid by the borrower (that’s you) based on an agreed-upon fee that becomes part of your closing costs, while other times brokers get paid by the lender that’s ultimately chosen to fund the loan.

Typically, a mortgage broker’s commission is around 1% to 2% of the loan borrowed (or $1,000 to $2,000 per $100,000). The upshot: Though you might have to pony up cash to use a broker, this person can help you not only find a lender but also negotiate for you—meaning you don’t have to do any haggling yourself to nab a low-interest home loan.

Am I comfortable getting a mortgage online or prefer hands-on guidance?

Online mortgages are growing in popularity, particularly for younger home buyers: One recent survey by NerdWallet found that 64% of millennial mortgage applicants would prefer to get it all done digitally. Though online lenders often offer lower mortgage rates and fees, they’re not right for everyone.

If you care about the kind of one-on-one, face-to-face service you get when you work with a local mortgage lender, be aware that you don’t typically get that with an online lender (although many online mortgage lenders do employ loan officers you can speak to on the phone).

Another reason an online lender may not be a good fit: Many don’t employ mortgage specialists who know the ins and outs of your local market, which can be a disadvantage if you’re applying for a complicated loan, such as a mortgage for a self-employed borrower.

Nonetheless, “online lenders are great for conventional scenarios: salaried borrowers without financial or credit complications, and properties that are typical for the area in design, lot size, condition, and amenities,” says Richard Redmond, author of “Mortgages: The Insider’s Guide.”

The moral of the story: You’ll have to weigh your loan needs and comfort level of completing the entire mortgage process online before choosing an online lender.

Do I want to work with a small or large lender?

Choosing between a small lender, like a local credit union, and a larger national lender, such as Bank of America or Wells Fargo, is mostly a matter of preference. But knowing which you’d prefer can help you find the right lender to fit your needs. If you like personal service, it may make sense to choose a small mortgage lender in your local area. Indeed, the bigger the bank, the more business it does, which means you’re just one of thousands of clients, so it may not bend over backward to attend to your every whim, says Bruce Ailion, a mortgage broker at Re/Max Town and Country in Atlanta.

If you don’t have much time to waste, a larger lender may be a better choice, since the bigger banks have in-house underwriters and larger teams to process mortgage applications faster.

Another factor consider: Large lenders may have more payment options such as online payment or automatic mortgage deduction. Also, big banks often let you do everything online, from your mortgage application to account management. (Many local lenders don’t have as well-oiled online banking systems.)

To better weigh all your mortgage options, head to realtor.com/mortgage to compare lenders and learn more.

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A Guide to Mortgage Interest Rates: Why They Go Down and Up, and What to Do

April 11, 2019

Mortgage interest rates are a mystery to many of us—whether you’re a home buyer in need of a home loan for your first house or your fifth.

After all, what does “interest rate” even mean? Why do rates swing up and down? And, most important, how do you nab the best interest rate—the one that’s going to save you the most money over the life of your mortgage?

Here, we outline what you need to know about interest rates before applying for a mortgage.

Why does my interest rate matter?

Mortgage lenders don’t just loan you money because they’re good guys—they’re there to make a profit. “Interest” is the extra fee you pay your lender for loaning you the cash you need to buy a home.

Your interest payment is calculated as a percentage of your total loan amount. For example, let’s say you get a 30-year, $200,000 loan with a 4% interest rate. Over 30 years, you would end up paying back not only that $200,000, but an extra $143,739 in interest. Month to month, your mortgage payments would amount to about $955. However, your mortgage payments will end up higher or lower depending on the interest rate you get.

Why do interest rates fluctuate?

Mortgage rates can change daily depending on how the U.S. economy is performing, says Jack Guttentag, author of “The Mortgage Encyclopedia.”

Consumer confidence, reports on employment, fluctuations in home sales (i.e., the law of supply and demand), and other economic factors all influence interest rates.

“During a period of slack economic activity, [the Federal Reserve] will provide more funding and interest rates will go down,” Guttentag explains. Conversely, “when the economy heats up and there’s a fear of inflation, [the Fed] will restrict funding and interest rates will go up.”

How do I lock in my interest rate?

A “rate lock” is a commitment by a lender to give you a home loan at a specific interest rate, provided you close on your home in a certain period of time—typically 30 days from when you’re pre-approved for your loan.

A rate lock offers protection against fluctuating interest rates—useful considering that even a quarter of a percentage point can take a huge bite out of your housing budget over time. A rate lock offers borrowers peace of mind: No matter how wildly interest rates fluctuate, once you’re “locked in” you know what monthly mortgage payments you’ll need to make on your home, enabling you to plan your long-term finances.

Naturally, many home buyers obsess over the best time to lock in a mortgage rate, worried that they’ll pull the trigger right before rates sink even lower.

Unfortunately, no lender has a crystal ball that shows where mortgage rates are going. It’s impossible to predict exactly where the economy will move in the future. So, don’t get too caught up with minor ups and downs. A bigger question to consider when locking in your interest rate is where you are in the process of finding a home.

Most mortgage experts suggest locking in a rate once you’re “under contract” on a home—meaning you’ve made an offer that’s been accepted. Most lenders will offer a 30-day rate lock at no charge to you—and many will extend rate locks to 45 days as a courtesy to keep your business.

Some lenders offer rate locks with a “float-down option,” which allows you to get a lower interest rate if rates go down. However, the terms, conditions, and costs of this option vary from lender to lender.

How do I get the best interest rate?

Mortgage rates vary depending on a borrower’s personal finances. Specifically, these six key factors will affect the rate you qualify for:

  1. Credit score: When you apply for a mortgage to buy a home, lenders want some reassurance you’ll repay them later! One way they assess this is by scrutinizing your credit score—the numerical representation of your track record of paying off your debts, from credit cards to college loans. Lenders use your credit score to predict how reliable you’ll be in paying your home loan, says Bill Hardekopf, a credit expert at LowCards.com. A perfect credit score is 850, a good score is from 700 to 759, and a fair score is from 650 to 699. Generally, borrowers with higher credit scores receive lower interest rates than borrowers with lower credit scores.
  2. Loan amount and down payment: If you’re willing and able to make a large down payment on a home, lenders assume less risk and will offer you a better rate. If you don’t have enough money to put down 20% on your mortgage, you’ll probably have to pay private mortgage insurance, or PMI, an extra monthly fee meant to mitigate the risk to the lender that you might default on your loan. PMI ranges from about 0.3% to 1.15% of your home loan.
  3. Home location: The strength of your local housing market can drive interest rates up, or down.
  4. Loan type: Your rate will depend on what type of loan you choose. The most common type is a conventional mortgage, aimed at borrowers who have well-established credit, solid assets, and steady income. If your finances aren’t in great shape, you may be able to qualify for a Federal Housing Administration loan, a government-backed loan that requires a low down payment of 3.5%. There are also U.S. Department of Veterans Affairs loans, available to active or retired military personnel, and U.S. Department of Agriculture Rural Development loans, available to Americans with low to moderate incomes who want to buy a home in a rural area.
  5. Loan term: Typically, shorter-term loans have lower interest rates—and lower overall costs—but they also have larger monthly payments.
  6. Type of interest rate: Rates depend on whether you get a fixed-rate mortgage or an adjustable-rate mortgage, or ARM. “Fixed-rate” means the interest rate you pay remains fixed at the same level throughout the life of your loan. An ARM is a loan that starts out at a fixed, predetermined interest rate, but the rate adjusts after a specified initial period (usually three, five, seven, or 10 years) based on market indexes.

Tap into the right resources

Whether you’re looking to buy a home or a homeowner looking to refinance, there are many mortgage tools online to help, including the following:

  • A mortgage rate trends tracker lets you follow interest rate changes in your local market.
  • mortgage payment calculator shows an estimate of your mortgage payment based on current mortgage rates and local real estate taxes.
  • Realtor.com’s mortgage center, which will help you find a lender who can offer competitive interests rates and help you get pre-approved for a mortgage.

 

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