Using Funds in Your Retirement Plan to Purchase a Home

A great place to look for funds to help you when you are purchasing a home is your employer retirement plan, also called a 401(k). Options here may include different types of loans and withdrawals, including what are called hardship withdrawals. It is a great resource if you are able to access the funds. Different plans will have different provisions, so check with either your human resources department or your 401(k) plan administrator.

With general purpose loans and primary residence loans, there will be limits as to how much you can access, and you may be asked to provide documentation, such as a signed sales contract, for a primary residence loan to prove that you are, in fact, purchasing a home.

Another way to access funds is through a hardship withdrawal. A hardship is a specific circumstance when you can access funds from your 401(k) when you otherwise wouldn’t be able to.

While purchasing a home wouldn’t necessarily be a hardship for you, it is one of several housing-related reasons that the IRS allows you access to your money. Other similar reasons include the need for funds to avoid eviction or foreclosure. 401(k) plans, by the way, aren’t required to offer either loans or hardship withdrawals, so contact your plan administrator or search your plan’s website for more information. The document you’ll be looking for is called the 401(k) Summary Plan Description. This can often be dozens of pages long, but it covers all aspects of the plan, including what access you have to your money.

Keep in mind that any type of withdrawal will often be subject to taxation and may have early withdrawal penalties associated with it.

Let me help you review your options when taking money from your 401(k) to purchase a home. I am just a call or email away.

What Is a Balloon Mortgage and How Does It Work?

A balloon loan is a mortgage where, at some point in the life of that loan (at perhaps three, five, seven or 10 years), the entire outstanding balance must be paid in full. To be clearer on this, the loan would more than likely paid back by refinancing it into a new loan.

So how does it work to begin with? A balloon loan is similar to a 30-year fixed-rate mortgage in how you qualify for it, meaning the same income, credit and asset requirements.

The reason that someone might want to take a balloon loan, as opposed to a 30-year fixed-rate loan, is that the interest rate (and hence, the payments) are normally lower on the balloon loan. People who take balloon loans often enter the transactions with the expectation that they will be selling the properties before the balloon payments become due.

The drawback to a balloon loan, if there is one, is that if and when you reach the point where the balloon payment is due, to get into your new loan, you could be paying a significantly higher interest rate than the one with which you started.

For this reason, if you are looking to take out a balloon loan, you want to make reasonably sure that you are going to be out of the property when the loan comes due, or perhaps stay with the 30-year or even a 15-year fixed-rate option.

Would you like to learn more about balloon loans? Call or email me and we can go over the details and what is the right fit for you.

What Is a Bridge Loan and How Does It Work?

A bridge loan is used to span the time between two other mortgages. Say you are in the process of purchasing one home while you sell another. To keep you from having to carry two mortgage payments at the same time plus providing a down payment for the new property, you might seek out a bridge loan.

In certain circumstances, this may be of benefit to you: for example, if you are trying to purchase your new home in a competitive seller’s market. If you are bidding alongside other bidders, they may look more attractive to sellers due to the fact that they have no homes to sell. A bridge loan could help your chances.

How does a bridge loan work? There are several types to choose from.

One type is where the bridge loan completely pays off the existing mortgage. At that point, you just make payments on your new mortgage, then pay off the bridge loan once your existing property sells.

Another type is where you take out an additional mortgage on your existing home and use those proceeds strictly as a down payment on the new property. You would still be carrying two mortgage payments at this point.

Keep in mind that interest rates for bridge loans are much higher than those for traditional mortgages, making them expensive. Another point to note is that they can only be taken out for so long.

Before entering into any bridge loan, you want to be reasonably certain that you are going to be able to sell your existing home at close to the price you need to get for it.

If you find yourself in a situation where a bridge loan could get you from one home to the next, let me help you sort it all out. Call or email, and we can go over the options that work best for you.

The Importance of HOAs in Financing Condos

Condominiums are great for the people who live in them, as they offer lower-maintenance living, including landscaping and other services, in the monthly association dues.

Financing a condominium is similar to financing a single-family residence, with a few exceptions.

These differences are important to lenders, specifically the fact that condos have homeowners associations, which run the operations of the subdivisions or developments and determine the direction in which they are headed.

These associations are so important to lenders that the lenders reference what is called an approved condo list in determining if they want to lend money within a development. Real estate agents are able to determine if the development is on the approved list before you start looking at condos.

There are companies that regularly send out authorized people on behalf of lenders to do both a physical inspection of the property and a thorough assessment of the finances of the association as well as the rules and regulations of the development. What they are looking for are trends and signs that the association is well managed and financially sound, both now and into the future. This is for the benefit of both the lenders and the people who borrow money from them, but mostly for the lenders.

If you are in the market for a condo, let me guide you through the process of finding and financing an approved condo. I am always here to help, and I am just a phone call or email away.

Financing an Investment Property That You Can Rent Out

From a financing perspective, an investment property is similar to a property you would purchase to live in, although with different guidelines. So what exactly is an investment property?

For our purposes here, it is a property that has 1-4 units. Anything larger would fall into what would be considered commercial financing. Being that FHA, VA and other programs only offer financing for properties where owners plan to live, your financing choices will, by and large, be limited to conventional financing, which means a Fannie Mae or Freddie Mac program. Along these lines, if you do plan on buying a multi-unit property and plan on living in one of the units, only then can you use primary residence financing.

As far as a down payment on an investment property, you can expect it to be 20% of the purchase price. Lenders want to know that you have a vested interest in this transaction and want to make it work.

With regard to credit, it needs to be nothing less than stellar. This means high credit scores and, more importantly, no recent major blemishes, such as bankruptcies or foreclosures.

As far as asset reserves go, you can expect to need up to six months of your monthly expenses of principal and interest, property taxes, and homeowners insurance.

In some cases, you can use the income from the rental property itself as part of your income. Keep two things in mind, though. One is that the allowable income from the property will be reduced by 25% for what is called an occupancy factor. The other thing is that an appraiser will determine the fair market rent that you can use as income.

I am here to answer all of your questions and provide financial guidance with regard to your next rental property purchase. Please give me a call.

What Exactly Is a Jumbo Loan and Who Can Get One?

When a home buyer or existing homeowner takes out a mortgage to purchase or refinance a home, they are often taking out either a conventional (meaning Fannie Mae or Freddie Mac) or FHA mortgage. This is all well and good, but these mortgage types have limits as to the dollar amounts that can be had, and the limits vary in different parts of the country.

In 2020, the Fannie Mae limit, also called a conforming limit, is between $510,400 and $765,600.

The range for FHA mortgages is $331,760 to $765,600, and the numbers quoted above are for one-unit properties. Limits are higher for 2-4 unit properties.

However, people in many parts of the country (specifically, on both coasts) live in areas where loan amounts far exceed these limits.

What people looking to finance properties in these areas do is take out what are called jumbo loans. These jumbo loans look similar to traditional mortgages in that they offer 10-, 15-, 20- and 30-year terms and are available in fixed and variable rate versions.

How jumbo loan borrower profiles differ from the traditional borrower profiles includes the debt-to-income ratios. They are lower with a jumbo loan, meaning that a lower percentage of income may be used to put toward the house payment.

Some lenders will also require two appraisals to make sure that the property is worth what they think it is worth.

I am your jumbo loan expert and want to answer all of your questions. I am just a phone call or email away.

How Does a Mortgage Subordination Agreement Work?

First of all, what in the world is a mortgage subordination, and what is a mortgage subordination agreement?

When you have two mortgages on a property, one must be subordinate to, or behind, the other. This all comes down to who gets paid first in the event that the property goes into foreclosure and needs to be sold. Any time there is more than one mortgage on a property, a subordination agreement must be put into place to clarify who will be in what is called “first position.”

Typically, on a home with two mortgages, the more traditional (as in a 15- or 30-year fixed mortgage) will be in first position, then the second mortgage (which could be a home equity loan or line of credit) will be in second.

One lender may carry both the first and second mortgages on a property, but in many cases, a lender may want to limit their exposure on a property by holding only one of the mortgages.

The second mortgage may be taken out at the same time as the first or at some later date. A subordination agreement would also be needed, for example, if you had both a first and a second mortgage and wanted to refinance only the first mortgage.

In this case, the new first mortgage lender would have to create a subordination agreement with the lender of the existing second. Without this, the lender of the second mortgage could move into first position after the original first mortgage is paid off.

So why would any lender want to stand in line behind another? Because second mortgage lenders can charge higher interest rates than first mortgage lenders.

Please let me know if I can answer any additional questions you have about how mortgage subordination and subordination agreements work. I’m always here to help.

What Is a Mortgage Recast and Is There a Benefit?

A mortgage recast is similar to you paying down your mortgage but in a different way. The traditional way to pay down your mortgage is to simply increase the payment you make and tell your lender that you want to apply the excess toward your principal balance.

Doing this will get your mortgage paid off more quickly, but at the same time, the minimum you need to send in each month will be the same as it has always been.

A recast works a little bit differently. Here, you give your lender a set amount of money to pay down the loan. Unlike in the prior example, though, your loan payment will be recalculated downward after the new money has been factored in.

There are both upsides and downsides to doing this. Let’s look at both.

You paying down the loan using a recast would, of course, lower your payment, both for interest and principal each month. This would lower your overall month-to-month obligations, and looking at this for the long term, and you would have much less outlay in terms of principal and interest expense.

The drawbacks are that doing the recast wouldn’t get your loan paid off any faster (though you could still pay it down further) and that the lender will charge you a non-refundable fee to do this.

If you have further questions about how recasts work, I am here, at your service, to answer any and all of them. Please either call or email me.

How Does an Appraisal Work on a Purchase Transaction?

If you are purchasing a home and planning on borrowing money when doing this, your lender will want an appraisal on the property. So, what exactly is an appraisal?

An appraisal is an evaluation of the property for two main reasons. The first is to see what general condition the property is in.

Keep in mind that while appraisers are looking for specific things in a property, such as the condition of the roof, kitchen, bathrooms, etc., they won’t go into as much detail as a home inspector would. Home inspectors will look into the property much more thoroughly, such as checking the electrical, heating and plumbing systems.

The second reason for the appraisal to be ordered is to see how this property compares to other similar and similarly priced properties in the area, called comparables. All properties have unique qualities that make them worth more or less than their comparables.

These are necessary so the lender has an idea of what they could sell the property for should the buyer be unable to make the payments.

As far as how the appraisal process itself works, it all starts with the signing of the contract. Once this happens, the appraisal is ordered, and you pay for the cost of the appraisal upfront.

The lender then contracts out what is called an appraisal management company (AMC) to perform the appraisal. These are third-party companies whose appraisers, by design, have no contact with the lender itself. This is to prevent any influence from the lender.

Once the appraisal is complete, it is sent to the AMC for review, then to the lender.

If you have further questions about how appraisals work, I am here, at your service, to answer any and all of them. I am just a call or email away .

What Debt Will Be Used on My Mortgage Application?

The debt that will be used on your mortgage loan application will largely be what comes off of your credit report. This mainly means things like installment payments, which includes car payments. It also means revolving debt, which is made up of credit card debt.

What it doesn’t include, in most cases, are things like monthly expenses for groceries, clothing, etc.

What you will also need to disclose, even if it isn’t on your credit report, is any type of alimony or child support payments that you are required to make, though they would appear on a divorce decree.

If you have this type of debt and you don’t disclose it, if the lender were to find out about it through court documents (yes, they do pull those), then that is considered fraud and would start a new process in itself.

All of the debt on your credit report will be used to calculate your financial ratios, with at least one exception. This is installment debt, such as a car loan, where there are 10 or fewer payments remaining on the loan. At this point in the loan, the lender will remove this debt from your ratios.

Along these lines, it is a good idea to have your credit regularly pulled so you can see exactly what the lender will see when they pull it at the time of application.

Should you have further questions I can answer about debt on your mortgage application or even would like me to pull your credit, please give me a call.