My Real Estate Tips

One of the best definitions I’ve heard for escrow is:

“A procedure in which a third party acts as a stakeholder for both the buyer and seller, carrying out both parties’ instructions, and assumes responsibility for handling all of the paperwork and distribution of funds.” 

In a real estate transaction or home purchase, the title company becomes the “third party.”  If you purchase a home through a real estate agent or broker, he/she will prepare the purchase contract or agreement.  Within the agreement there will be a paragraph that refers to the EARNEST MONEY and will spell out the amount to be deposited with an “escrow agent” (the title company).  Generally the amount is about 1% of the purchase price rounded up or down.

Escrow is often referred to as earnest money.  It’s referred to that way because a buyer who signs an agreement to purchase real estate is saying that by signing the agreement and putting up a deposit he means what he is saying in earnest.  He is making the deposit to show good faith.

 Escrow or Earnest money deposits are often confused with down payments, which they are not.  The earnest money deposit will eventually be applied toward the amount of down payment or to any of the other costs involved in the transaction.

 An easy way to think of escrow or earnest money is, pretend you are at a garage sale and you see a new set of tires that will just fit your vehicle.  They are asking $200 for a great set of tires that look like new, but you only have a $20 dollar bill with you.  The man running the sale doesn’t know you and if you leave to go get the money from the nearest ATM, he may sell the tires before you return.  So, you offer him a deposit toward the purchase to hold them until you can return with the money.  If he agrees he has just accepted your earnest money or good faith money, or escrow deposit.  It’s as simple as that.

 A second type of escrow account is created when you borrow money to finance the purchase of a home.  The mortgage lender becomes the escrow agent and creates an account in your name in order to set money aside to pay the real estate taxes and insurance on your property.  Taxes and insurance normally are paid in a lump sum annually.  To make it easier on you, a small amount is contributed to the account each month from your house payment.  It adds up through the year and when it’s time to pay the bill for your taxes and insurance, you have enough money in your escrow account to do it.  When taxes or insurance go up, which they all do, your mortgage company will increase (adjust) your monthly payment so there will be enough money there to pay for them when they become due.  On some rare occasions your payment may be adjusted downward when a surplus occurs.

 That’s it – one escrow account is created when you are in the process of purchasing a property, and the second is created by your mortgage company to accrue money each month towards the taxes and insurance on the property after you buy it.

Tweet This Post 

Owner financing is often attractive because it doesn’t appear to have the hassle involved with endless credit checks and personal employment and resource verifications.  It’s difficult to qualify for a home or commercial property loan if you are self employed or if you don’t have a verifiable employment history of at least 24 months.  If your credit score (FICO) is below 620 and you have a few glitches on your credit history it will be difficult to qualify for a property loan these days without doing some credit repair work.  So, owner financing becomes an attractive option.

If you are interested in owner financed real estate, you should be aware that there could be some pitfalls when securing owner financing.  Owner financing is often offered on properties that would be difficult to market with conventional financing, therefore as an incentive to buy they are offered with owner financing.  It doesn’t mean that the property is automatically no good, just that you should be cautiously aware of the reason owner financing is being offered and should check out the property carefully. 

There are some positive reason why owner financing can be a good alternative for both sellers and buyers.  For sellers who own their property outright, it may be much more profitable to carry the mortgage on the property they sell than to take cash from third party financing.  With the stock market still unstable, with limited and risky returns on investment and savings accounts, and certificate of deposit interest rates very low, a real estate backed mortgage with a decent rate of return of 6 or 7 % (and even higher on some owner financed transactions) looks pretty good. 

So, the owners get a return that’s often better than placing their money in stocks or savings accounts.   For buyers it should be easier to qualify for owner financing and loan process should be less time consuming. 

If you are offered owner financing, insist on receiving a title policy on the property involved, it can be paid for by the seller or buyer, but more often than not it is furnished by the seller to guarantee his title.  Be sure the financing offered contains a mortgage and deed of trust, with favorable terms on the note.  Get a fixed rate of interest and a term (length of loan) long enough to have affordable payments. 

I don’t recommend a transaction known as “contract for deed”.  These transactions are full of problems and are even illegal in some states.  This transaction is where the deed is not transferred to the buyer until he completely pays off the loan (contract).  Too many things can happen that are harmful to the buyer on these property transactions.  An example would be, the property could already have a loan to the seller attached to it.  That loan may be foreclosed on and the property claimed by the seller’s lender.  This could be the seller’s original purchase loan or even an equity loan for home improvement.  The property also could be taken by the IRS for the seller’s tax debt.  In other words, with a “contract for deed” you could make payments on a property for years and still lose it through no fault of your own. 

So be very careful when you consider owner financing.  Owner financing may be the perfect solution for you or it could be a real nightmare if you are not careful.  Proceed with caution.

Tweet This Post 

If you are planning on using an FHA loan to finance your real estate purchase, here are ten things you need to know before you apply for your loan.

1. EMPLOYMENT — FHA or HUD do not have a required minimum length of time a borrower must have held a position of employment, but do require the lender to verify a two year employment history.  Any gaps in that history longer than a month must be explained.  FHA will make allowances for seasonal employment if you provide a note of explanation.
2. GIFT FUNDS — If you don’t have all the down payment and closing costs required to qualify for a loan, you are allowed to use a gift from someone to make up some of the difference.  It must be verified with a gift letter from the giver.  The person who is giving you the money must be a “blood” relative, employer, or acceptable charitable agency.
3. MATTRESS MONEY — You must account for the down payment and any other money to be used to close the loan, such as closing costs and prepaid items (taxes and insurance payments).  If you don’t have the money in the bank, you can say you are going to use cash money you have on hand or at home.  If you do, they may require you to explain how you were able to save the money and what period of time it took to accrue the funds.
4. JUDGMENTS — If you have a judgment against you and it’s on your credit record, you can still qualify.  However, you must have ether made arrangements with the court judge to make payments and be able to verify 6 months of on-time payments or the judgment must be paid off.
5. CLOSING COSTS — FHA allows the seller in a transaction to pay up to 6 % of YOUR closing costs.  You can even include some of your prepaid items if they are listed as closing costs.  Ask your real estate agent about including this in your offer to purchase.
6. FICO SCORES — You don’t have to have perfect credit to get a good loan.   You must have a credit score (FICO) of 620 to qualify for an FHA loan.  If your score is low, be prepared to pay more money down and a little more interest on your loan as a penalty for having the low score.  This is because your loan will be considered a higher risk.
7. COLLECTIONS ON YOUR CREDIT REPORT — You can still qualify if you have a few creditors who have turned you in for collection and they (FHA) won’t require you to pay them off, EVER!
8. DOWN PAYMENT — FHA’s minimum down payment is now 3-1/2%, however the more you put down, the more likely you will be to qualify.  Keep this in mind if you have more than just a few credit problems.
9. OTHER UP FRONT COSTS — In addition to your down payment, FHA requires you to prepay some of the mortgage insurance (MIP) at closing.  That cost is 1.75% of the loan amount.  They DO NOT require this if your loan is 90% or more of the sales price, so you can save if you put 10% down.
10.   RESERVES — FHA does not require you, as do some other loans, to have two or three months payments in addition to the costs of closing the loan, in reserve in the bank.  However if you do have extra money left in the bank, you are more likely to get qualified.

I hope this little guide has helped you in you quest toward homeownership, my very best wishes to you on your search.

Tweet This Post 

Getting a new mortgage loan today can be confusing.  Contrary to what you often see on the news lately, there are plenty of mortgage loans available.  In fact, there are too many to completely cover here.  My aim is to pull back the curtain and give you information on the programs I think are some of the best available.

VA — Still a great program, designed for the veteran.  It’s the one place a veteran can get a home loan up to $729,000 at a reasonable interest rate and 0% that’s ZERO PER CENT down payment.  There are no PMI charges required as there are on FHA and Conventional loans of more than 80%.  There are less strict credit qualification standards for veterans and lower income requirements.  The loans have no prepayment penalties.  In Texas and a few other states, there are also veteran’s programs (that include National Guard and Army Reserve members) for purchases of land and homes with loans insured by the state. 

FHA — For the non-veteran, FHA is still the best, offering a 30 year fixed mortgage with a 3-½% down payment plus 1.75% PMI up front, or 5.25% total down.  They allow the seller to absorb 6% of your closing costs and some prepaid items, so if you are a good negotiator, it’s possible to get into a home for no more than 5.25% of the sale price.  FHA loan limits aren’t as high as VA but are still substantial at $289,000.  They are a little more relaxed on credit requirements than on conventional loans.  If you put a little more down, like 10%, you can avoid the up front 1.75% PMI charge.  They will also allow you to receive a gift of the cash involved from a blood relative, your employer and some charitable agencies.

FHA (k) — This is their new “streamlined” loan program.  It has all the same basics of a regular FHA loan plus you can add up to $35,000 in home rehabilitation or remodeling costs to your loan as long as the work is completed with in 30 days.  The maximum loan though is still $289,000 including the repairs and improvements.  This program is great for buying damaged foreclosed homes.

CONVENTIONAL — There are way too many conventional loan programs to cover here, but if you have the time and can find a good independent loan broker, he will take your qualifying information and comb through the many programs offered and give you a synopsis of the ones that best suit your needs.  I’ll be giving some tips on finding a good loan broker in a future article. 

INCENTIVES — Don’t forget about the tax credit.  This is a credit for new home buyers (someone who hasn’t owned a home in 3 years). The incentive under the Bush package was $7500 tax credit for buying a home and it had to be paid back in payments over 7 years.  Under the new stimulus program that was changed to $8,000 and you don’t have to pay it back.  That means whatever you normally pay in taxes for the next year after you buy a home you get the first $8,000 of it back. 

Don’t be discouraged by what you hear on the news, good loan programs are out there, and now is a very good time to buy a home. 

Tweet This Post