Mortgage Envy: Portfolio Lender May Provide the Answer
Question: Recently a friend got a mortgage from a local bank to buy a new house. His income goes up and down radically from year to year, but he always pays his bills--sometimes a bit late--and is a solid citizen.
We were surprised when we learned he got a big mortgage, because we had such a hassle when we applied for a mortgage last summer and had just one late payment on our credit report because of defective merchandise purchased. I know his credit report is much worse than ours. What are we doing wrong?
Answer: You probably aren’t doing anything wrong. However, you should get that late payment removed from your credit reports if you had a valid reason for not paying until the problem was corrected.
Your friend who got a big home mortgage from a local bank probably borrowed from a “portfolio lender.” Such lenders can be very flexible because they keep their loans “in portfolio,” rather than sell them, as other lenders do, to secondary mortgage market buyers like Fannie Mae and Freddie Mac.
Another possibility is that your friend got an adjustable rate mortgage. Most originating banks and savings and loan institutions retain their adjustable-rate loans in portfolio, because they automatically adjust the interest rate if the index--such as the cost of funds, CD interest rate or other index--goes up or down. Thus, they are very safe for lenders.
Few Sellers Need to Get Professional Appraisals
Q: Because the market for homes in our neighborhood is excellent, my wife and I are thinking about selling our home, probably in January or February. Should we hire an appraiser? Or is the estimated market value from a Realtor sufficient?
A: You probably don’t need to hire a professional appraiser unless your home is unusual or in an area where there haven’t been many recent home sales. However, you should interview at least three successful real estate agents who sell homes in your vicinity. The reason to interview three (or more) agents is to cross-check their evaluations of your home’s market value.
If you interview only one agent, he or she might “low ball” your home’s market value. That means the agent will estimate a low valuation, hoping for a quick, easy sale.
When you interview three or more agents, watch out for an agent who “high balls” your home’s value, hoping you will list with him or her because of the high sales price.
Each agent interviewed should give you a written comparative market analysis. Use that terminology to show the agents you know what you’re doing.
The analysis documents each agent’s opinion of your home’s market value, based on recent sales prices of comparable nearby homes. It also shows the listing prices of similar neighborhood homes for sale and the asking prices of recently expired comparable home listings.
Deal Needn’t Include Mortgage Insurance
Q: My husband and I want to buy our first home, but coming up with a down payment is our main hurdle. We’ve heard about Fannie Mae’s “Flex 97” plan, with a 3% down payment, but we learned it involves private mortgage insurance premiums. Is there any way to buy for about a 10% down payment without these payments?
A: Yes. Most real estate lenders are familiar with 80-10-10 financing to avoid private mortgage insurance premiums. It involves a 10% cash down payment, a new 80% first mortgage and a 10% second mortgage either carried back by the seller or obtained as a home equity loan.
A variation is 80-15-5 with a 5% down payment, 80% first mortgage and a 15% second mortgage. If the seller won’t carry back the second mortgage for you, many first mortgage lenders can arrange a second mortgage for up to 30 years with private mortgage insurance.
To Save Money, Close Escrow Late in Month
Q: I recall that you once mentioned the best day of the month to close a home purchase to keep closing costs down, but I forgot it. My son is buying a townhouse. What day of the month should he close the purchase?
A: The best day of the month to close a home purchase is the last business day; however, if the last business day of the month falls on a Monday or the day after a holiday, close on the previous business day. Avoid closing on a Monday because most lenders will charge interest from the previous Friday, even though the new owner does not yet have possession of the home.
Mortgage interest is collected in arrears, so by closing on the last or next to last business day of the month, the buyer has to pay interest at closing for only a day or two. However, if the closing is at the beginning of the month, the borrower must pay interest at closing for the entire month.
Disclosure, Warranty Put the Jitters to Rest
Q: We’re in the process of trying to buy a house. We got pre-approved for a mortgage, so we’re not worried about the financing. However, we are concerned about things that could go wrong with the house after purchase.
What if the seller doesn’t disclose all the defects before purchase? Do we have any recourse, for example, if the roof leaks? Also, some houses are offered for sale with one-year home warranties. Others are not. Our buyer’s agent says if the seller won’t pay for a one-year home warranty policy, we can buy one for about $350. Is this a good idea?
A: When a seller fails to disclose known defects to the prospective buyer, that is fraud, and the seller can be liable if the buyer later sues the seller for damages. But your challenge, as a buyer, is proving that the seller knew of the roof leak before the sale.
If the roof leaks during the first rain after purchase, it’s pretty easy to prove the seller knew or should have known. But what if the roof leak doesn’t become apparent until a heavy rain several months after purchase? Then the buyer might have a difficult time proving that the leak existed at the time of the sale and that the seller knew and failed to disclose it.
As for your question about home buyers obtaining a one-year home warranty policy, I highly recommend such policies even if you have to pay the cost. However, ask the seller and the real estate agents to pay the cost. Agents often will agree to pay the modest cost to keep their buyers happy. Such policies pay for repairs to inside plumbing, wiring, built-in appliances and heating (air-conditioning is often excluded).
Each home warranty company offers slightly different coverage. For an additional fee, you can include roof, air-conditioning and swimming pool coverage.
Remodel or Sell: Realty Agents Can Give Facts
Q: My husband wants to add a third bedroom, family room and second bathroom to our two-bedroom house, which was built in 1938. We live in a modest, working-class neighborhood with mostly well-maintained homes and only a few “dumps,” occupied by renters. However, we like our neighbors, and our daughter loves her school.
Do you think we should spend about $40,000 to make these improvements? Our kitchen also needs updating. I think we should buy a new house instead, even though it won’t be as well-located, within about 20 minutes of my husband’s work. What do you advise?
A: There is no right or wrong answer to your question. However, I am concerned that if you add $40,000 of improvements to your modest house, you could be over-improving. How will the house compare, after improvements, to the nearby houses? Will you have more invested in it than the house would sell for? Chances are you won’t get $40,000 more for your home after improvements.
Before making those improvements, invite several successful nearby realty agents to inspect your home and to give you their written market value opinions. Tell them you’re thinking of improving it or possibly selling. These agents will be glad to give you their listing presentations because they have a 50-50 chance of getting your listing if you decide to sell. After you have all the facts, then decide.
Be Wary About Doing Fix-Ups Full Time
Q: My husband and I just finished adding a den and second bathroom to our home. Friends have made many positive comments about my husband’s work. Now he wants to quit his job and buy rundown houses in good locations, fix them up and profitably sell them. We plan to sell our house and use part of our profits to get us started. Is this a wise thing to do and is it profitable?
A: Buying fixer-upper houses and living in them for at least 24 months before selling can become a very profitable tax-free business, thanks to Internal Revenue Code 121.
Of course, plan to make only profitable improvements. Examples include painting, landscaping, repairing, adding new light fixtures and adding second bathrooms. These improvements usually add far more value than they cost.
But avoid unprofitable improvements including new roofs, foundation repairs, swimming pools and room additions since they don’t add more value than their cost.
Adding that den and second bathroom to your current home probably didn’t add much more market value than the cost of labor and materials. Be sure you know what you’re doing before getting full time into the home fix-up business.
However, you’ll need income to live on. Also, if you have to get new mortgages and/or loans to finance the improvements, it will be tough to get approved without jobs. I suggest your husband keep his job and confine his fix-up activity to weekends and vacations.
Selling House ‘As-Is’ Avoided Fix-Up Costs
Q: Thanks for your great advice, a few weeks ago, to a reader who was undecided about fixing up her house before sale. Since the market was so hot, you suggested she put her house up for sale “as is” for 60 days. If it didn’t sell, then you recommended fixing it up.
We took your advice in our similar situation. It would have cost us about $15,000 to fix up our house, but we decided to sell “as is.” Within two weeks, our Realtor sold our house “as is” at practically the full asking price. We saved all the fix-up hassle. She told us the sellers plan to thoroughly remodel before moving in. We’re so happy we didn’t waste money on a fix-up that the buyers might not have liked.
A: Thank you for sharing your successful experience. I have exactly the same situation myself and will probably test the market for 60 days to see if the house will sell “as is” in its current condition. If it doesn’t, I’ll take it off the market, fix it up and relist at a higher asking price to reflect the renovation costs.
Classified Ads, Web Site Open House Hunt
Q: In March or April, my husband will be transferred to Houston for his job. His employer’s relocation firm will handle the sale of our house, so that is not a problem. However, we’re wondering how to start our home search. Should we have friends in Houston send us the local newspapers so we can check the classified ads? What about searching on the Internet?
A: A recent survey found that most home buyers consult newspaper classified ads to start their home searches. Many newspapers publish their classified ads on the Internet, so you can check there too. Also, check the biggest online home sales Web site, https://www.realtor.com. Use both newspapers and the Internet to start your home search.
Equally important is comparing the quality of the school districts in the areas you like. When you narrow your home search to specific neighborhoods and before offering to purchase a home, insist on a written school report for the kindergarten through 12th grade schools. The real estate agents you contact should provide this as part of their service.
Even if you don’t have children, the school quality will affect how your new home appreciates in market value. If you have any difficulty obtaining a written objective school district report, check https://www.schoolmatchonline.com.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco, CA 94128. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.
