South Bend Home Loan

Monday, December 16, 2013

How To Become a Real Estate Investor

I often have people contact me who are interested in purchasing an investment property.  They think that real estate could be a good investment for their futures and they want to wade into the arena while the home prices and interest rates are still low.

I couldn't agree with them more.  Owning investment homes has been a part of my financial plan for 10+ years.  It has provided my family with a higher net worth than we would have had otherwise and, if all goes according to plan, it should let me retire in my late 50's with a steady stream of rental income to cover our expenses so that I can spend my days reading great books and kayaking on the creek behind our home.  Ahhhh.....

But I digress.  Owning rental homes is a good option for you to consider.  Before progressing too far though, there are some things that you need to know....

You Gotta Have Some Money

When you're buying a home to live in, the financing terms are pretty flexible.  FHA will let you buy with 3.5% down and USDA with 0% down.  If your income is within the right range, you could even qualify for down payment help from the state.  If the seller is willing to cover your closing costs, you could potentially buy a home to live in right now with no personal investment from your savings.

Not so with an investment property.  If you're using the traditional structure where you get a mortgage from a bank for the purchase, you typically need 20% of the price down with an investment property (ie, $10k down on $50k purchase, $20k down on $100k purchase, etc.).  Unfortunately, many first time investors don't have that much available.

If you can find a home that you like that is a Homepath home, the down payment needed drops to 10%.   Homepath homes are homes that have been foreclosed on by Fannie Mae.  You can find eligible ones here: 

This 10% is still more than many first time investors have in liquid funds, though.  The only other real option, then, is to try buying with non-traditional financing.  Sometimes a seller will act as the bank for you (called a land contract sale or lease option).  Other times, you can find a partner who has the liquid money ready to invest. 

These scenarios can be hard to find though.  Most investors will need to wait to purchase their first investment property until they have saved the money needed for that 10% or 20% down payment.

Your Bills Need To Be Lower

Another thing that gets in the way for many first time investors is that their current bills are too high to qualify for the new mortgage.  When a bank is reviewing your finances for the mortgage approval on the investment property, they will add up your current bills (mortgage on primary home, car payments, student loans, credit cards, etc.) and then add the mortgage payment for the investment property to that amount.  Once they have that total, they will divide it by your gross monthly income.  Ideally, all of those monthly payments including the new mortgage should total less than 36% of your monthly gross income.  You may be approved up to 43% if your credit is good and you have strong savings, but 36% is the target. 

The bank typically won't give you any credit for the expected rental income on the home you are buying because you are new to the investment game, so your current income has to be high enough or your current bills have to be low enough to fit the new mortgage in as-is.  If the space isn't there, you may need to reduce your bills or increase your income before qualifying for this mortgage.

Your Savings Needs To Be Higher

The last hurdle most investors face is that their savings aren't high enough to be approved.  Many would-be investors already have a mortgage on the home they live in.  When the bank is looking to approve them for the new mortgage for the investment property, they are going to want the buyer to have six month's worth of mortgage payments for both their current home and the new home set aside in savings. 

This six months is in addition to the down payment money needed, which makes a hard savings target even harder to hit.  The good news on this is that these savings can be held in a retirement account.  If you have a 401k or IRA that has a larger balance, that investment can often be used to meet the requirement for savings.  If you don't though, you may need to save this six months of reserves before jumping into the investment property pool.

The Bottom Line

So what's the bottom line to all of this?  Many people want to invest in real estate, and they should.  It can be a great way to build current income and long-term wealth.  It's not an easy market to get into though.  By understanding the lender's requirements in terms of down payment, debt load and savings, you will be better equipped to plan for your future and step into this arena when the timing is right for you.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here.

Friday, December 6, 2013

So The Poo Can't Get Through

When someone is buying a new home, their thoughts are typically full of barbeques and decorations, holidays and new memories being made.  Some buyers might be more focused on the buying mechanics like inspections, appraisals and loan approvals.  Few homebuyers are thinking about sewage stuff though.  Few buyers are thinking about the poo.

Poo matters though, especially for homes with septic tanks.  This is a bit of an icky topic but it's one that home buyers should be educated on so let's take a couple of minutes to talk about what happens to poo in your new home and how it can impact you.

What is a septic tank?

For starters, let's talk about septic tanks.  If your new home is on city water and sewage, this doesn't impact you.  For many home buyers in Michiana, though, their new home has a well for water and a septic tank for waste.

A septic tank is simply a big concrete or steel tank that is buried in your yard.  The waste water from your sinks, toilets and tubs flows out of your house through piping and into the septic tank.  Once there, the heavy stuff (think food waste and heavy poo) settles to the bottom as a sludge layer, the lighter stuff (think TP and floating poo) goes to the surface as a scum layer.  In between those is a cleaner water layer.  This water layer isn't 'clean' clean though.  It has household chemicals and human-made chemicals in it that make it pretty gross still and definitely unfit for any form of drinking.

What is a drain field?

This is where the drain field comes in.  When new waste comes into your septic tank, it pushes old waste out.  That old waste flows through 4 inch perforated pipes that are buried in gravel about 4-6 feet down under the dirt in your yard. 

The old septic water slowly seeps out of those perforated holes in the pipes as it flows through them.  How fast it seeps out and how long those pipes need to be depend on the nature of the soil that they are buried in.  If it's clay or stone, the water will leak out slowly so the drain field needs to be larger to give it enough space.  If the soil is sandy, the water will vacate more quickly so the drain field can be shorter. 

All of this is powered by the magic of gravity.  Your house is higher than your septic tank and your septic tank is higher than the drain field pipes.  As you flush, wash, and do other household tasks involving water, this system automatically works to remove it and filter it for you.

What about the well?

Ah, now we're getting to the important question.  If you're on a well/septic system, your household water is coming from a well.  And where is that well water coming from?  Your yard.  And what water is found in your yard?  In addition to the God-given rain water, it's the water that is coming from your drain field.

It sounds gross in theory, but the system typically works great.  The water seeping out of your septic through the drain field is filtered by good old Mother Earth to the point where it is safe by the time it reaches your well. 

Where It Can Go Wrong

There is risk here though.  The septic system could be working incorrectly.  Your well water could be contaminated.  That's why St. Joseph County requires all septic systems to be inspected and all water to be tested at the time of a property transfer.  It's an important step to make sure your water is currently safe and is likely to continue being safe.

Typically these two tests are all that is needed when you're buying a home.  If you are buying a home with FHA financing, though, FHA requires more.  To protect the homebuyer, FHA requires that the well be at least 50 feet away from the septic tank, 100 feet away from the drain field and 10 feet away from the property line.  Click here to see the actual HUD Property Guidelines (see page 12, 3rd paragraph).  If the county's code is looser than this, HUD will allow the drain field distance to be reduced to 75 feet but that is the minimum. It doesn't matter if the water test passes and the septic system is fine.  FHA wants these distances met.

Here's where this is a problem.  In our neck of the woods, drain fields and wells are often less than 75 feet.  We have smaller lots in some areas and these pieces all have to fit into them.  Our county only requires a 50 foot distance between the well and drain field so many installers have installed septics based on this.  That means these homes don't meet FHA's guidelines.

Many times, a home won't meet FHA guidelines and the FHA financing will still go through.  If the appraiser says the home appears to meet FHA's guidelines for well/septic distances, the lender normally doesn't call for an inspection to verify it.  An appraiser may say this and be wrong though.  That happens.  A lot.

The appraiser may not say that it meets the requirements also and then the lender is going to need to have those distances measured to see if the 75 feet is met.  If it is not, the well will need moved, the buyer will need to convert to conventional financing or the sale will not be able to proceed.

If you're buying a home with a well and septic system, it's important that you understand the basics of how they work.  If you're buying that home with FHA financing, it's VERY important for you to understand FHA's rules on this.  It can prevent your financing from going through if the distance is shorter than allowed.  While a waiver can be obtained from FHA sometimes (typically if the soil is largely rock or clay), there's no guarantee.  FHA doesn't want the poo to get through, so they grant those waivers cautiously.

Working with an educated lender who understands the way septic systems work and how FHA judges them differently is going to be important to your overall home buying experience.  Be picky.  Work with an expert who can help make your home buying experience smooth so that you can forget about the poo and get back to planning that first barbeque.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here.