Wednesday, July 15, 2009
10,000 lenders set their own standards
Some loan advisors claimthat the big nationalmortgage companies,Fannie Mae and FreddieMac, set underwriting standards for nearly all mortgage loans. Fannie and Freddie actually account for less than 40 percent of the residential real estate financing issued throughout the United States. A big number, yes, but hardly all-powerful. Moreover, Fannie and Freddie do not perfectly mirror each other. Both Fannie and Freddie publish underwriting guidelines, not edicts. Lenders who sell loans to Fannie and Freddie remain free to apply a reasonable degree of flexibility.
Summing Up: You Control Your Buying/Investing Power—Not the Lender
The “tell you exactly howmuch you can afford” approach to “preapproval” gives a snapshot photo of your property buying power—but only with that lender’s camera. Instead, think of your life as a moving picture. You not only star in this movie, you write the script, direct, edit, and determine the
ending. Do you want to own your own home? Do you want to own investment properties? Do you want to structure the best way to finance your acquisitions? Would you like to seriously improve your net worth? Would you like to live free of destructive debt? Would you like to achieve financial
independence? Yes. Then start now. It’s your movie. It’s your move.
ending. Do you want to own your own home? Do you want to own investment properties? Do you want to structure the best way to finance your acquisitions? Would you like to seriously improve your net worth? Would you like to live free of destructive debt? Would you like to achieve financial
independence? Yes. Then start now. It’s your movie. It’s your move.
Envision the property(ies) you would like to own 5, 10, or 15 years from now
At age 21, I bought my first “home.” It was a large old house that had been converted into four apartment units and the garage converted into a fifth unit—which is where I lived. It was owner-financed with 10 percent down and a 5 percent interest rate land contract. At the time, my friends had fun kidding me about the “dump” and my “slumlording.” (Actually, the property wasn’t that bad.) However, six years later, while enrolled in my PhD program at the University of Illinois, I owned (among other properties) a four-bedroom, two-bath, brick house that had previously belonged to the professor who chaired my doctoral dissertation. (Incidentally, he even financed it for me at 7 percent interest and 10 percent down.)Where weremy friends living? Most lived in rental apartments. None lived in (much less owned) a home anywhere near as nice as mine. (I am not bragging—just trying to show the power of knowledge, goals, and action.)
What’s the Moral?
As real estate prices throughoutNorthAmerica (and throughout theworld) have skyrocketed during the past five years, many potential first-time buyers and investors feel frustrated. They hesitate to buy and invest. But if you hesitate, you will only lag further behind.
Renters: Make Ownership Your First Priority
Had I continued to rent when I was age 21, I would not have been able to own the upscale house I bought at age 27. Your best chance today to own the home you would like in, say, 5 or 10 years is to first become a property owner as quickly as possible. Weigh carefully the advantages of buying a property that makes you some quick cash (rental income, fixer-upper, bargain-priced foreclosure). Do not complain that prices have gone through the roof (remember, push aside the self-denying, goal-defeating self-talk). Instead, create a financial plan that places you on the fast track to the property(ies) you really want.
Gain a Great Tax Break
Since 1998, tax law has permitted homeowners to sell their homes every two years and pocket their profits tax free (up to $250,000 for singles and $500,000 for married couples). This tax break means that you can buy a bargain-priced fixer-upper, renovate as you live in it, and then sell for a profit (the economy willing) in two years; then repeat as necessary or desired. Want to earn an extra $100,000 to $250,000 (more or less) in tax-free gains during the next four to six years? Weigh buy, renovate, and resell fixer-upper properties.
What’s the Moral?
As real estate prices throughoutNorthAmerica (and throughout theworld) have skyrocketed during the past five years, many potential first-time buyers and investors feel frustrated. They hesitate to buy and invest. But if you hesitate, you will only lag further behind.
Renters: Make Ownership Your First Priority
Had I continued to rent when I was age 21, I would not have been able to own the upscale house I bought at age 27. Your best chance today to own the home you would like in, say, 5 or 10 years is to first become a property owner as quickly as possible. Weigh carefully the advantages of buying a property that makes you some quick cash (rental income, fixer-upper, bargain-priced foreclosure). Do not complain that prices have gone through the roof (remember, push aside the self-denying, goal-defeating self-talk). Instead, create a financial plan that places you on the fast track to the property(ies) you really want.
Gain a Great Tax Break
Since 1998, tax law has permitted homeowners to sell their homes every two years and pocket their profits tax free (up to $250,000 for singles and $500,000 for married couples). This tax break means that you can buy a bargain-priced fixer-upper, renovate as you live in it, and then sell for a profit (the economy willing) in two years; then repeat as necessary or desired. Want to earn an extra $100,000 to $250,000 (more or less) in tax-free gains during the next four to six years? Weigh buy, renovate, and resell fixer-upper properties.
Reprogram Your Thoughts to Deliver Self-Fulfilling Messages
Reprogram your self-talk. Erase your self-denying complaints. Never describe your behavior in self-demeaning ways. Give yourself a jolt each time you let self-denying assertions short-circuit your search to improve. As you eliminate self-defeating self-talk, replace it with goal-promoting
self-talk. Ask yourself questions. Brainstorm answers. Adopt attitudes and habits that advance you toward the life you would like to live. For example,
self-talk. Ask yourself questions. Brainstorm answers. Adopt attitudes and habits that advance you toward the life you would like to live. For example,
- What are six ways that I can save more?
- What are six ways I can cut spending?
- What are four ways I can stop running up credit card bills and start paying them down?
- What are four ways that I can work toward a $1 million net worth within 15 years?
- How can I use real estate to help build wealth?
Self-Defeating Self-Talk Destroys Wealth-Building
Dr. ShadHelmstetter explains that we create our own difficulties (financial and otherwise) through self-defeating self-talk (What to Say When You Talk to Yourself, Pocket Books, 1987). Do any of the following statements creep into your self-talk?
results you really want.
- I can’t remember names.
- I’m always running late.
- I can never get organized.
- I’m always short of money. I just don’t know where it goes.
- No way could we ever save enough for a 20 percent down payment.
- No way could we ever afford a property in that neighborhood.
- Get qualified for a mortgage? Not with my credit.
- At the rate we’re putting away money for retirement, I’ll probably be working until I’m 75.
- I don’t believe that infomercial hype. I know that I could never raise enough cash to invest in real estate.
- I just can’t seem to lose weight.
results you really want.
Align self-talk with your priorities
Are you reading Mortgage Secrets to learn how to deal with shaky credit, lowcash, affordability, and so on?Good! You’ll findmore creative financing ideas here than anywhere else. Yet to focus on creative financing begs the ultimate question: Why do you confront such financial issues? Are you managing your money as well as you could?
Tuesday, July 14, 2009
Personal versus Financial
Did you quickly dismiss the idea of buying a fourplex? Was it a gut emotional decision, such as “I don’t want to call an apartment building home-even if I amthe owner”?Or, did you look at themoney that you couldmake and decide that even with an extra profit of $100,000, it’s not worth it?
Subtle Distinction
Emotional decision makers quickly decide an issue according to their whims of superficial likes and dislikes. They pass by future fortunes for present comfort. For example, do you know people who drive new or nearly new cars with big loans but can’t afford to save or invest in property? How many people turn down bargain-priced fixers because they don’t want to make the repairs? How many renters remain long-term renters because buying would give them a longer commute or place them in a neighborhood that seems less desirable than where they currently live?
Just recently, I erred along these lines. (Yes, even pros can make mistakes—especially when they forget to follow their own buying rules.)
Emotional Delay (or Withdrawal)
In this case, the pro was me. I evaluated an investment property (a singlefamily house).The owner agreed to finance the propertywith just 5 percent down. The property was located in a neighborhood of professionals; it suffered no problems of disrepair or deferred maintenance. However, notwithstanding these advantages, a couple of features in the house turned me off. I hesitated to make an offer. Rather than quickly weighing all advantages and disadvantages, I focused only on what I didn’t like. That was a big mistake. The next investor who looked at the property bought it.My failure to quickly size up the opportunity costme an excellent property that was offered with terrific seller financing.
Avoid Mistakes Similar to Mine
Separate the financial from the emotional—only then will you judge fairly whether the decision exposes you tomore cost than benefit. As humans,we seemto be hardwired with emotional response. Yet, to build your financial future you can’t let emotions control. Persistently weigh and consider. Yes, identify what you like and don’t like, what you want and don’t want. Then attach a dollar price tag. Don’t think here and now. Think of your future returns. Throughout Mortgage Secrets you’ll discover dozens of property purchase and financing techniques. Each of these offers trade-offs. Some require effort, inconvenience, or discomfort that at first glance may seem unappealing. Please, though, leave that possibility in view until you’ve examined it closely. Do now what most people won’t do. In 10 years, you’ll do what most people never can.
Subtle Distinction
Emotional decision makers quickly decide an issue according to their whims of superficial likes and dislikes. They pass by future fortunes for present comfort. For example, do you know people who drive new or nearly new cars with big loans but can’t afford to save or invest in property? How many people turn down bargain-priced fixers because they don’t want to make the repairs? How many renters remain long-term renters because buying would give them a longer commute or place them in a neighborhood that seems less desirable than where they currently live?
Just recently, I erred along these lines. (Yes, even pros can make mistakes—especially when they forget to follow their own buying rules.)
Emotional Delay (or Withdrawal)
In this case, the pro was me. I evaluated an investment property (a singlefamily house).The owner agreed to finance the propertywith just 5 percent down. The property was located in a neighborhood of professionals; it suffered no problems of disrepair or deferred maintenance. However, notwithstanding these advantages, a couple of features in the house turned me off. I hesitated to make an offer. Rather than quickly weighing all advantages and disadvantages, I focused only on what I didn’t like. That was a big mistake. The next investor who looked at the property bought it.My failure to quickly size up the opportunity costme an excellent property that was offered with terrific seller financing.
Avoid Mistakes Similar to Mine
Separate the financial from the emotional—only then will you judge fairly whether the decision exposes you tomore cost than benefit. As humans,we seemto be hardwired with emotional response. Yet, to build your financial future you can’t let emotions control. Persistently weigh and consider. Yes, identify what you like and don’t like, what you want and don’t want. Then attach a dollar price tag. Don’t think here and now. Think of your future returns. Throughout Mortgage Secrets you’ll discover dozens of property purchase and financing techniques. Each of these offers trade-offs. Some require effort, inconvenience, or discomfort that at first glance may seem unappealing. Please, though, leave that possibility in view until you’ve examined it closely. Do now what most people won’t do. In 10 years, you’ll do what most people never can.
Other Wealth-Building Ideas
Later chapters further show how your property purchase and financing decisions will impact your net worth 5 to 20 years in the future. You will learn to evaluate mortgage prepayments, hort-term mortgages, fix-up properties, bargain-priced properties, foreclosures, real estate owned (REOs), and low-interest-rate financing. Few homebuyers or investors compare thoroughly.Most people figure that their property will appreciate. Eventually they’ll make a fair amount of money. No oubt, history proves them correct; however, history also shows that buyers who weigh and consider a range of property and loan choices can build much larger investment gains.
Monday, July 13, 2009
Own a Rental Property; Boost Your Affordability and Wealth-Building
For purposes of loan “preapproval,” most loan reps assume that you’re buying a single-family house or condo. The loan rep might say that, based on your income andmonthly payments, the bank would loan you $200,000. If you’ve got $50,000 for a down payment, you could look at houses (or condos) in the $250,000 price range.
1
Now see how much more you could afford to borrow if you bought a fourplex, lived in one unit, and rented out the other three. Since your rental income from three units will expand your borrowing power, you could buy a property worth say $600,000 (instead of $250,000).
2
If each of these potential properties appreciates at 4 percent per year, and if after five years the mortgage balance on each falls to 92.5 percent of the original balance, you can see in Table 1.1 how your equity would build with each property.
The part home, part rental fourplex expands your affordability and boosts your networth by $173,250 (vs. $70,000 for the house).The fourplex more than triples your original cash investment.Although specific property
Table 1.1 5-Year Equity Buildup
1
Now see how much more you could afford to borrow if you bought a fourplex, lived in one unit, and rented out the other three. Since your rental income from three units will expand your borrowing power, you could buy a property worth say $600,000 (instead of $250,000).
2
If each of these potential properties appreciates at 4 percent per year, and if after five years the mortgage balance on each falls to 92.5 percent of the original balance, you can see in Table 1.1 how your equity would build with each property.
The part home, part rental fourplex expands your affordability and boosts your networth by $173,250 (vs. $70,000 for the house).The fourplex more than triples your original cash investment.Although specific property
Table 1.1 5-Year Equity Buildup
| # | Single-Family House | Fourplex |
| Purchase price | $250,000 | $600,000 |
| Amount financed | 200,000 | 550,000 |
| Appreciated value @ 4 percent p.a. | 305,000 | 732,000 |
| Mortgage balance year five | 185,000 | 508,750 |
| Equity | 120,000 | 223,250 |
| Original down payment | 50,000 | 50,000 |
| Investment gain | 70,000 | 173,250 |
Practice Possibility Thinking
The folks who urge you to get preapproved for a loan rarely mention that you can choose from hundreds of loan products. Each of these products may vary as to interest rate, down payment, credit standards, monthly payments, mortgage insurance premiums, qualifying ratios, closing costs, eligible properties, occupancy standards, and many other terms and conditions. In fact, banks and mortgage brokers may not offer many of the best purchase and financing ossibilities.
Sometimes you can even design and create a financing plan. Though most borrowers choose some off-the-shelf loan product, some lenders (and many sellers) will customize specifically—if you know how to ask, and what to ask for.
As you read through Mortgage Secrets and reflect upon the ins and outs of property finance, ask yourself, “Would this ideawork forme (us)?”Today, financing options exist for nearly everyone who wants to own a home, refinance a home, or buy an investment property. Know the possibilities. Cut wasteful personal spending. Shape up your credit profile. Lift your credit scores. Look for ways to reduce the costs of your loan. Explore the many paths that lead to alternative financing.
As you will see, possibility thinking pays big returns.
Sometimes you can even design and create a financing plan. Though most borrowers choose some off-the-shelf loan product, some lenders (and many sellers) will customize specifically—if you know how to ask, and what to ask for.
As you read through Mortgage Secrets and reflect upon the ins and outs of property finance, ask yourself, “Would this ideawork forme (us)?”Today, financing options exist for nearly everyone who wants to own a home, refinance a home, or buy an investment property. Know the possibilities. Cut wasteful personal spending. Shape up your credit profile. Lift your credit scores. Look for ways to reduce the costs of your loan. Explore the many paths that lead to alternative financing.
As you will see, possibility thinking pays big returns.
For the Answers You Need, Go Beyond Automated Underwriting
Some unthinking loan reps just plug your financial information into their computer AU system (automated underwriting) and provide an easy answer. Loan reps who follow a quick and simple approach not only fail to explore all choices, they slight you in a more seriously deficient way. Their “one size fits all” mindset ignores contextual data that explicitly reviews where you are now, where you would like to go, and the best way to get there.Never accept anAU-generated response, until you answer questions such as the following:
- What are your goals to build wealth?
- How do your household expenses differ (positively or negatively)
from the affordability assumptions imbedded in the AU computer
software? - Do you spend, save, and invest to achieve your life priorities?
- How long do you plan to own the property?
- How can you improve your credit scores?
- How can you improve your qualifying ratios?
- What percent of your wealth should you hold in property?
- What types of real estate financing (other than those offered by the
lender you’re talking with) might best promote your goals for cost
savings or wealth building? - What types of real estate financing (other than those offered by the
lender you’re talking with) might best enhance your affordability? - What type of property (fixer, foreclosure, duplex, fourplex, single-
family house, condo, apartment building, commercial, and so on)
might advance you toward your financial goals? - How much would a larger down payment save you?
- Should you use a fixed-rate or an adjustable rate mortgage (ARM)?
Given your situation, what are the risks and opportunities of each?
Which choice offers the best trade-off of risk and return (quickest
buildup of property equity)?
Although savvy loan reps can help you answer life-planning questions, the majority will not. The majority lack time, knowledge, and incentive to 4JWPR045-01 JWPR045-Eldred September 4, 2007 13:33 Char Count= 0 AFFORDABILITY DEPENDS ON YOU—NOT A LENDER guide you. Loan reps are like car salesmen. They encourage you to buy product(s) they are selling. Would you expect unbiased auto advice from the sales agent at the Honda dealer? No? Then why would you expect unbiased advice from the loan (sales) rep at the Old Faithful Mortgage Company?
Recall the theme of Mortgage Secrets: First, take measure of yourself. Learn your choices. Arrange your property purchase and financing decisions to advance your life goals. A majority of borrowers err because they attempt to minimize their monthly payment rather than maximize their wealth.
Most lenders compare income to monthly payments, but you need more depth, more vision. Decide for yourself: Should you buy more (or less) property than an AU system suggests? Should you borrow more (or less) than this lender’s guidelines recommend?
Selected Sources and Techniques to Achieve Affordability
Accessory apartments
Adjustable rate mortgages
ARM assumptions
ARM hybrids
Balloon mortgages
Blanket mortgages
Buy a duplex, triplex, or quad (tenants pay mortgage)
City down payment assistance
Co-borrowers
Co-ownership
Co-signers
Community reinvestment loans
Compensating factors
Contract-for-deed
County down payment assistance
Create value/fixer-uppers
Employer-assisted mortgage plans
Energy efficient mortgages
FHA assumable w/qualifying
FHA Title 1 home improvement loans
FHA 203(b)
FHA 203(k)
FHA 203(b) mortgages
FHA 203(k) mortgages
Fannie Mae affordable mortgage programs
Fannie Mae Community Home-buyers programs
Fannie Mae Start-up Mortgage
Fannie 97
Financial fitness programs
Freddie Mac central city mortgage programs
Gift letters
Government grant money
Habitat for Humanity homes
Homebuyer counseling centers
Homebuyer seminars, fairs, classes
HUD/FHA foreclosures
HUD homes with easy financing
Interest rate buydowns
Interest rate buy-ups
Interest only mortgages
Lease-options/lease purchase
Lease-purchase agreements
Mortgage credit certificates (MCCs)
New home builder finance plans
Not-for-profit grant money
Option ARMs
Owner will carry (OWC)
Pledged collateral
Private mortgage insurance (PMI)
Reverse annuity mortgages
Second mortgages
Self-contracting
Shared equity
Shared housing/housemates
State mortgage bond programs
State VA mortgage programs
Subprime mortgages
Sweat equity
Tenant-in-common (TICs)
USDA Rural Development Loans (formerly FmHA mortgages)
VA assumable w/qualifying
VA mortgages
VA REOs with VA financing for non-veterans
Wraparounds
Adjustable rate mortgages
ARM assumptions
ARM hybrids
Balloon mortgages
Blanket mortgages
Buy a duplex, triplex, or quad (tenants pay mortgage)
City down payment assistance
Co-borrowers
Co-ownership
Co-signers
Community reinvestment loans
Compensating factors
Contract-for-deed
County down payment assistance
Create value/fixer-uppers
Employer-assisted mortgage plans
Energy efficient mortgages
FHA assumable w/qualifying
FHA Title 1 home improvement loans
FHA 203(b)
FHA 203(k)
FHA 203(b) mortgages
FHA 203(k) mortgages
Fannie Mae affordable mortgage programs
Fannie Mae Community Home-buyers programs
Fannie Mae Start-up Mortgage
Fannie 97
Financial fitness programs
Freddie Mac central city mortgage programs
Gift letters
Government grant money
Habitat for Humanity homes
Homebuyer counseling centers
Homebuyer seminars, fairs, classes
HUD/FHA foreclosures
HUD homes with easy financing
Interest rate buydowns
Interest rate buy-ups
Interest only mortgages
Lease-options/lease purchase
Lease-purchase agreements
Mortgage credit certificates (MCCs)
New home builder finance plans
Not-for-profit grant money
Option ARMs
Owner will carry (OWC)
Pledged collateral
Private mortgage insurance (PMI)
Reverse annuity mortgages
Second mortgages
Self-contracting
Shared equity
Shared housing/housemates
State mortgage bond programs
State VA mortgage programs
Subprime mortgages
Sweat equity
Tenant-in-common (TICs)
USDA Rural Development Loans (formerly FmHA mortgages)
VA assumable w/qualifying
VA mortgages
VA REOs with VA financing for non-veterans
Wraparounds
Affordability depends on you
In the world of property finance—for homebuying and investing—the loan market offers thousands of lenders and hundreds of financing techniques. Plus, interest rates, closing costs, credit standards, and underwriting guidelines vary among lenders. Read through the following list of 65 affordability techniques; these techniques only sample your loan alternatives. Because you enjoy a cornucopia of choices, no loan rep (or anyone else) can tell you exactly how much loan (or how much property) you can afford until they work through these and other possibilities. If one lender (or seller) says, “No,” you say “Next.”
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