South Bend Home Loan

Wednesday, January 30, 2013

VA Loans – The Flax Seed of Mortgage Lending

I’ve hit an age where I’m paying more attention to health-related issues than I used to.  I even bought a subscription to Prevention Magazines and find myself reading it cover to cover each month.  The articles often overwhelm me, though, and I end up doing nothing because I don’t know what steps to take.

Take flax seed, for example.  They say it’s some kind of wonder food that can fight heart disease, diabetes and cancer, but how am I supposed to actually use it?  Ground or un-ground?  Baked or stirred in?  Always with dairy, never with dairy?  It’s so easy to use a good thing wrong and, in the process, cancel out the benefit of that good thing.

When it comes to mortgage financing, I find that Realtors feel the same type anxiety about some very good things, like VA lending.  They know it’s probably great for their clients, but they don’t know enough about it to feel like they won’t mess it up.

To help take the fear away, let me put on my ‘Loan Doctor’ hat and explain the uses, benefits and, yes – potential side effects - of the VA Mortgage.

What is a VA Mortgage?

A VA mortgage is a loan made by a mortgage lender that is guaranteed by the Department of Veteran Affairs.  The borrower must be an eligible Veteran or the surviving spouse of an eligible Veteran, and they must qualify for the loan with an acceptable credit history, income and employment history, just like with other loan types.

Why is a VA Mortgage Good?

A  VA mortgage is not just good – it’s GREAT.  It offers 100% financing and lets the seller pay all of the closing costs and prepaid items as long as they don’t exceed 4% of the price of the home.  This lets most Veterans purchase a home with no personal investment needed.
VA mortgages normally have great interest rates (lower than conventional rates currently) and there is no monthly mortgage insurance charged on the loan.  This piece alone is HUGE and can save the Veteran a ton of money over time.  VA does charge a funding fee that is rolled into the loan, but if the Veteran has at least 10% VA disability, that fee can be waived. 

What are the potential ‘Side Effects’?

The problems that occur with VA financing can typically be avoided with some upfront education.  For example, VA requires that the home meet some minimum property requirements.  Much like with FHA financing, these requirements are there to protect the buyer.  Full detail on VA’s requirements can be found here:  VA Minimum Property Requirements.  In a nutshell, if a Realtor looks at a home from the standpoint of ‘is it safe, structurally sound and sanitary?’ they will likely be able to rule most homes in or out without studying VA’s full code.  

VA also has some unique rules on which costs it will allow the buyer to pay.  VA will not allow the buyer to pay the title company’s settlement/closing fees.  A pest inspection is also required with all VA loan and the buyer can’t pay for it.  The Realtor should write it into the purchase agreement upfront that these items will be paid by the seller.  Realtor office administration fees also can’t be charged on VA loans, so the Realtor should make sure their broker is aware of this.

The Veteran’s Administration is also going to be very exact on the paperwork, and they typically require all documentation related to the purchase to match the Veteran’s Certificate of Release or Discharge from Active Duty, known as the DD214.  This form is used by the lender to confirm that the buyer is eligible for VA Financing.  It’s wise for the Realtor to ask the buyer how his/her name appears on the DD214 before writing the purchase agreement and then use that full DD214 name on all paperwork.

So, summarizing, the Realtor should 1) look the property over carefully, to make sure it would be safe, sound and sanitary for the buyer; 2) get the full name from the Veteran’s DD214 to use on the purchase agreement; and 3) write that the seller will pay for the title company’s closing fees and pest inspection as a part of the initial offer.  Doing this will avoid the most common ‘side effects’ of VA financing. 

Time to Try the Flax

Definitely, there are some unique features of VA financing.  A little education goes a long way, though, and those unique items don’t need to be a problem for you or your buyer. 

Print out this post and keep it where you can find it when a VA buyer comes calling.  Better yet, put my name and number in your phone (Lori Hiscock, 574-707-0196) and call me when buyers mention their military service.  I can walk you and your clients through the process step by step so that they can benefit from all of the great features offered by the VA mortgage.

Speaking of benefiting from great features…it’s time to take some action on my part too.  I’m off to my local health food store to get some flax seed.  Wish me luck!

Wednesday, January 16, 2013

The Case for Concessions

I had a Realtor text me today to ask if it was in her buyer’s best interest to request financial concessions from the seller.  The poor lady was overwhelmed, I’m sure, when I sent her back a 5 paragraph text full of the pros and cons.  It was a great question though, and one that should be discussed so – let’s discuss!

What are Concessions?
First, let me explain what I’m meaning by concessions.  In most home buying scenarios, the buyer can ask the seller to pay certain buyer cost on the buyer’s behalf such as their closing costs or prepaid items.  When the seller does this, it is called a seller concession.

Why would a buyer want the seller to do this?
Most buyers ask for this simply because it’s needed.  They have the money for their down payment but they do not have enough savings to cover their closing costs and prepaid items as well.  By asking the seller to pay those for them, they don’t have to wait to buy a home until they can save up that additional amount.

Sometimes buyers do have enough money saved up, but they would rather use that money to hit a higher down payment threshold.  When a buyer is using conventional financing, they will have a monthly charge added to their payment for private mortgage insurance (PMI) if they are not putting 20% down.  The cost for this insurance drops with every 5% increment hit for down payment, meaning it’s one rate at 5% down, cheaper at 10%, cheaper still at 15% and gone at 20%. 

If a buyer has enough money to put 8% down, for example,  and pay their own closing costs or to put 10% down and have the seller pay them, they may choose to have the seller pay them so that they hit 10% and drop the cost for their PMI.  This will reduce their monthly mortgage payment and save them money. 

Why wouldn’t a buyer want the seller to do this?                                                                   
If the seller pays these costs on behalf of the buyer, they are going to have to charge more for the house to cover that additional cost and still make the money off of the sale that they want.  That means that the buyer is typically going to pay more for the home and, subsequently, borrow more on their mortgage because the seller is paying this for them. 

How could this impact the buyer’s loan approval?
There is one primary way that this can cause a problem with the loan and that’s with the appraisal.  The appraiser’s job is to decide if the buyer is paying a fair market value for the home they are buying.  If they are paying more than the true value of the home because of the concessions, the appraiser will tell the lender the actual market value of the home.  The lender will base their loan approval off of that true, lower market value which means the seller will have to drop the price or the buyer will have to bring more money for the buyer to be able to get the loan.

While the appraisal coming back low is possible, this doesn’t happen most of the time.  Most home prices are within a fair market range even with those concessions added in.  A cut appraisal is a risk though.  Especially when buying a home in an area where the recent sale prices have been all very close to each other, paying more than that average because of these concessions can cause problems with getting the loan.

If the buyer wants the concessions, what should they know to use them right?
First, the buyer needs to remember to ask for this seller assistance at the very beginning with their offer.  The Realtor will likely ask the buyer if they want seller concessions, but if the Realtor doesn’t, the buyer needs to speak up and request it upfront.  Once the price is negotiated with the seller, it is very hard to go back and adjust for this.

Second, the buyer needs to know that there are limits to how much they can ask for.  Different types of loans set different percentage caps.  Currently, FHA will allow the seller to contribute up to 6% of the price, VA will allow up to 4% of the price, conventional will allow up to 3% and USDA has no cap.  These caps normally allow enough room to cover everything, but lower priced homes may not allow the seller to pay for all costs because of these limits.   If that’s the case, the buyer will need to be prepared to cover the remaining amount needed themself.

What should a Realtor know about seller concessions?
One thing that many Realtors don’t realize is how the concessions impact the sales data used by the appraiser.  When a Realtor pulls the recent sales information to help a buyer make an offer, they typically use the gross sales prices of those recent sales to determine a good market value.  The appraiser, however, will use the gross sales price MINUS the seller concessions to determine the value.  That means that, if the home next door sold for $75,000 and the seller contributed $3,000 towards closing costs, the appraiser will view that home as a $72,000 sale.  The Realtor should do the same thing when helping the buyer decide what to offer on the home they want.

So…what’s the final answer?  Are concessions good or bad?
As it is with most things in life, there is no ‘one size fits all’ answer.  Whether a buyer should request concession or not depends on the buyer’s situation.  Do they need the help or will requesting this save the buyer money on PMI?  Is the home’s value high enough to cover the slightly higher price caused by it?  If so, then it likely makes sense to request seller concessions.  If the answer to any of these is no, though, the buyer is likely best trying to pay for those costs on their own.