Proper Preparation: Mortgage

Buying a house is a long process and generally the decision to buy the new home is the longest part of the process.  In order to make the actual loan process easier, preparation is key.  I will provide a few tips that will have you ready once you make the decision to buy.

Here are the key documents your bank will request to process your loan;

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Tax returns:  Your lender will want full returns, which means depending on your occupation and how you are paid it may differ.  Have prepared, fully signed tax returns for your business (if applicable) and personal, K1’s, W2’s, all schedules.  If there is any way you were paid they are going to want to see it.  Some lenders want 2 years and some want 3 years, so just to be safe have 3.

Year to Date Profit and Loss:  If you are a small business owner, your lender is going to want to see how you are doing so far in that given year.

Paystubs:  Once you know that you are going to proceed with the loan process, get the last 4 paystubs for you and any other borrower on the loan.  That may be overkill, but better safe than sorry.

Current Mortgage:  If you own any current properties they will want to see homeowner insurance policies, HOA coupons, and most recent mortgage statements for all of them.  Once they pull your credit they will see them and ask for them, so just have them ready.

Bank Statements:  Generally they will want to see the last 3 months bank statements for all accounts that have funds.  This really has two purposes, one to see where the down payment will come from and two to verify that you have reserves.  Reserve requirements vary but usually the bank will want to see that you have anywhere from 3-12 months worth of funds to pay for the home in the bank after the down payment.

Derogatory History:  If you have had a short sale, foreclosure, or bankruptcy the lender will want to see a discharge letter and a hardship letter explaining the reason.  This is usually to satisfy a mitigation requirement for the lender and/or a regulatory guideline.

Here is the most important tip I can give in this process…  Have all of this information saved electronically.  Have it in either PDF form or another electronic form, so as soon as the application is taken you can send this all to the lender right away.  Timing is critical in a real estate transaction and hopefully this list can help you be properly prepared.

Please leave a comment or contact me with questions.

I Own My Building

One of the craziest things I run across in my line of work is how many professionals lease their building. Remember I am dealing with legal and medical professionals, so they are probably not going to change their occupations anytime soon. I hear all kinds of reasons as to why they choose to lease, and to each their own. What I like to do is try and provide some factual data and see if they are truly making the best decision for them.

Let’s use Downtown Las Vegas for an example. There are thousands of attorneys down in this area, many of them leasing their building. I will use slightly modified, real-life examples to give you a visual. I recently had an attorney that I met with and as we were talking I found out they were leasing their building. It was a 3 office, 1200 square foot building and they were paying about $2000 per month to rent it. They also had about $100,000 in savings that they were sitting on, which was earning them a whopping .1% interest (about $100 a year). A building like that probably sells for about $300,000.

Let’s do the math.

$300,000 Purchase

$60,000 Down Payment

5% Interest on the Loan

$5000 Cost of Origination Loan (Approx.)

25 Year Amortization

MONTHLY PAYMENT $1400 Approximately

Taxes and Insurance $300 per month

Total Cost $1700 (Approx.)

Savings Over Leasing $300 per month

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I try and base everything I do for my clients on saving them money and helping them to realize their long-term goals. A transaction like this accomplishes both of those goals for the client. Often the idea of going through a purchase like this is not worth the hassle for a business owner, but is it worth it if it saves you $36,000 in rent over the next 10 years that you would never get back from a lease? Remember your $100,000 in savings is only earning $100 per year in interest. This also gives you the opportunity to have another free and clear asset at retirement that you would not have by renting… and it’s cheaper.

I understand that this is not for everyone, but it is my goal to let people know their options. I would recommend everyone in a similar situation to do some research and reach out to a lender and/or real estate agent they trust and figure out if this is a feasible option for you. Plus, saying “I Own My Building” has a special ring to it.

Please leave a comment or contact me with questions.

Construct Your Credit

One of the first discussions I seem to have every time I take an application for someone is about their credit. I am either told, “their should be no problems, I have excellent credit” or “my credit is okay, but…” The “but” is usually I had a short sale, a foreclosure, or something along those lines. Regardless of your scenario, you should have an idea of what your credit score looks like well before you are in the market to purchase anything.

FICO is a credit score created by the Fair Isaac Corporation and utilized by most lenders to determine how credit worthy a borrower is. FICO scores are extremely difficult to master, but here are some key strategies to help increase your credit score.

Pay It. Paying your bills on time is the most important factor in building your credit. If your credit report is full of late pays and delinquencies then your credit is going to suffer.

Monitor It. If you do not know what your credit score is, then it will be very hard to know how to improve it. For example, in my last blog I discussed the mortgage crisis and how it was caused by subprime mortgages, but do you know what rate is considered subprime? Generally speaking subprime is a score of 620 and below. There are a few ways to monitor your credit; credit protection, monthly credit reports, and most credit card companies will let you see your credit score wen you log into your account.

FICO score range

Age It. The age of your credit is very important, so it is critical to keep that in mind. If you still have your first credit card from college, you may want to keep it. Your credit averages the length of time you have had your accounts, so closing old accounts or opening new credit accounts can be a negative.

Utilize It. Proper utilization of your credit accounts is very important. When discussing lines of credit or credit cards, you want to stay below the 30% utilization level. For example, if you have a $10,000 card, try not to carry a balance of over $3,000. It is much more important to your score to have the utilization rate below 30% than it is to have balances on multiple cards.

Diversify It. Try to get a good mix of credit products on your credit bureau. There is no perfect diversification when it comes to credit, but there are many options of products. Try to have a mix of credit lines, credit cards, mortgages, term loans, department store cards, etc.

Utilize It. In order to have strong credit you need to use your credit. All too often I have clients surprised by their credit score being lower than they expect. If all your bills are paid and you are not proactively using your credit it will negatively impact your credit.

Constructing the perfect credit score is almost impossible, but following these strategies will help. If you know you are going to need to buy a home or get a business loan in the near future, do your research. Find out what your credit score is and work on it if necessary. It takes time and often requires a strategy, but there are resources out there to help.

Please leave a comment or contact me with questions.

Realtors: A Lender’s View

Let me begin by saying that I am not a Realtor. That being said every loan that I facilitate on a piece of real estate, whether commercial or residential, has at least one realtor involved. I have worked with some of the best and I have worked with some that I would never want to work with again; however, as the lender I don’t get to decide. You Do!

If I had one piece of advice before you buy or sell a home, do some research on whom you will use. I would stay away from the, “my mom’s friend is a realtor, so I will just use her”. That always seems to be a disaster. You would be better off talking to some friends that just bought or sold and ask what they thought of their realtor. Get some names and interview a few of them and make an educated decision. It is a big deal.

realtor dupport sign

Just like having a really good banker or lender helping with the loan, your realtor is also an advocate for your best interests. With all of the regulation out there in the financial world today, you need a realtor that is willing to partner with you, the buyer/seller, and the lender. If everyone is not on the same page and working to get the deal done for you, then you will sit there and watch neighboring houses come and go while you miss out.

The way I look at it, besides you, the biggest winner in the transaction is the realtor, so they should be willing to get into the grind and help you buy or sell your home. I can tell you as a lender it is very refreshing to work with good realtors that understand rules, regulations, processes etc. When you have a strong realtor and a strong lender on your side, it doesn’t guarantee that there won’t be hiccups, but it greatly increases the likelihood that it will be a much smoother and successful transaction.

Your home is probably your largest asset, so keep it in the hands of someone that is savvy. I am sure you wouldn’t get heart surgery from a cardio vascular surgeon with 1 star on Health Grades, or let your kids be baby sat by someone with an F Rating. You should look at it the same way with your home. Go out and do some research, ask around, and find the person that you truly feel will do the best job for you.

Please leave a comment or contact me with questions.

The Misconceived ARM

I can’t tell you how often a borrower tells me that they will only have a 30-year fixed mortgage on their house because they don’t like ARM’s (adjustable rate mortgage). When I ask why, they almost all say “because that’s what caused the mortgage crisis”.   It is like these borrowers have meetings to practice this specific response. Anyway, this answer is false. The problem was sub-prime loans and interest only loans, but I will not get into the specifics for this blog. I would recommend watching “The Big Short” if you want a better understanding of this.

The other concern I often hear is that the homebuyer wants a 30-year fixed because they don’t want to have to worry about interest rates moving up while they live in their home or that they just like 30-year fixed loans better. Funny fact about that is the average American owns their home for less than 6 years before moving into their next home. Adjustable Rate Mortgages usually come in 3, 5, 7, and 10-year options. This means that the rate is fixed for that amount of time and then adjusts after. So my question would be, why pay more and get a higher interest rate on a 30-year fixed if you are only going to be in the home for 6 years.

Let’s break this down.

Flex ARM

If you need a $500,000 home loan, then a 30-year fixed rate on a jumbo loan like that is going to be between 4.5-5%. Let’s also say, chances are you will only live in that house for the next 6 years. Why would you care about those additional 20 years of fixed rate? Answer… You shouldn’t. Also, keep in mind that ARM products have rate caps now annually and over their lifetime, meaning you will never wake up and realize your loan is at 12%. You are now protected.

It would be much better to take advantage of a 7 year ARM at a rate of 3.25%. That is the difference of $2600 per month on the 30 year fixed compared to $2175 per month on the ARM. That is a savings of $425 per month, which could be a car payment, daycare, or just bank it in savings. Better yet, put the $425 per month into the market. If it hits the historical average over the next 10 years you will have about $75,000. Not bad for doing nothing more than picking the right loan for you. Even if you don’t know how long you will be in the house don’t waste money on a fixed rate mortgage when you can get a much better rate. As I always say, “do not waste money by paying the bank for extra interest that you will never see again”.

Update as of today 6/14/17 – The fed raised rates and hinted to more rate hikes this year. Take advantage of refinancing your home today.

Please leave a comment or contact me with questions.

Mortgages Are Like Cell Phone Plans

If I were to ask you what your Mortgage rate was would you know? Or would you say around 4.5%?   How about your cell phone plan? My guess is that it would be a similar answer. You would say something along the lines of, “around $120 per month”. This is all too common and I will tell you why you should know.

In the mortgage side of my business I use this analogy about cell phone plans a lot. If you have never asked about your cell phone plan, chances are you are getting raked over the coals. Cell phone companies are constantly coming out with better plans, but if you never ask about it then they will never tell you. Trust me! It is in the cell phone company’s best interest to keep you in the old, high priced plan until you ask about something better.

Mortgages are exactly the same. A mortgage company isn’t going to tell you they have a better rate and until you ask you are going to be wasting money on a rate that is too high. I would encourage everyone to know your mortgage rate and terms of your mortgage loan at all times. Here’s why. A quick example…

Let’s say you have a mortgage for $450,000 at a rate of 4.25% amortized over 30 years. Your payment before taxes and insurance is about $2,215 per month.   Now if you could convert that over to a rate of 3.35%, your new payment would be $1,983 per month. That is a difference of $232 per month. Sounds good, but look at that number further. That’s a savings of $2,784 per year, or $27,840 over the next 10 years, or better yet $83,520 over the life of the loan.   Even if it were to cost you $3,000 to originate the loan that is your first year savings, so who cares.

I know your next question, “I thought rates were going up and I can’t get those rates anymore”. You are partially correct. Rates are going up, but those rates that you hear about with the Fed are not necessarily correlated with mortgage rates. And, yes you can still get rates that low if you look. You just need to talk with someone knowledgeable in the mortgage arena to find the right product for you.

Bottom line… Don’t get gouged on your cell phone plan and more importantly don’t waste money on your mortgage loan. Ask questions and make sure you are taking advantage of the best deals out there. Hopefully you have updated both, but if you are still on your 2001 Nokia cell phone plan call me because I’m sure your mortgage is outdated as well.

Please share your thoughts.