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.

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

#	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.

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

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.”