Lenders often remind their clients that there are several ways to build equity in their homes. We thought it would be a good opportunity to do the same with our readers.
One way is through rising home prices: owners gain equity simply because their homes will be worth more. Another way is through a falling mortgage balance – as you pay off your mortgage each month through amortization, you pay a portion of interest and a portion of principal (assuming it’s not an interest-only home loan). Every time you make your mortgage payment you’ll gain some home equity.
Along those lines, some borrowers opt to make larger mortgage payments with the extra portion going toward principal. One way to do that is to make biweekly mortgage payments where payments are made twice a month instead of once a month for roughly half the monthly amount. With 52 weeks in the year, this means 26 payments are made – you can even go with a biweekly mortgage payment plan, where you make 26 payments throughout the year. This not only cuts the mortgage term, but saves our borrowers quite a bit of interest – check with your lender on the numbers. And a number of borrowers are opting for a shorten mortgage term such as a 15-yr loan.
Remodeling is on the upswing, and that is a very good way to build equity: make your house more valuable by making home improvements. And keeping your home well maintained and in good shape not only adds value, and thus equity, but makes a home much more enjoyable to live in. And lastly, putting more money down when purchasing a house automatically means you have more equity in it, and borrowers often can obtain better loan terms because of it.
Many borrowers have a sense that their home is “underwater,” where they owe more than the property is worth. Yes, values in many areas are improving, but they aren’t back to where they were five years ago for many. Traditionally, no lender is going to lend you more than the property is worth – the risk is too high – it’s better to just send them the keys. Right? Wrong. But there are some things borrowers should keep in mind.
Is a "deed-in-lieu" of foreclosure (in which the lender agrees to take back the keys and lets the borrower walk away) better than spending the time trying to do a short sale, especially because with a deed-in-lieu, the borrower now potentially can get a few months of free rent? No, or at least check with a reputable loan officer. Fannie Mae and Freddie Mac recently came out with new guidelines for a deed-in-lieu of foreclosure, and now homeowners with hardships can turn over the house keys and erase their debt - even if they are still current on their payments. Some struggling borrowers who relinquish their homes can live in them for up to three months without having to make mortgage payments.
Remember, though, that lenders only approve deed-in-lieu transactions if there is a single loan on the property or multiple loans with the same lender, which greatly limits their usefulness. In the vast majority of cases, it's usually not the most advantageous foreclosure-prevention option for a homeowner, assuming a lender will even agree to a deed-in-lieu.
It's better to do a short sale especially if there is more than one loan. That's because striking a deal with a first, purchase-money lien holder does not automatically get the homeowner off the hook when it comes to second or other junior loans. Also, in a deed-in-lieu agreement, a lender can require additional cash contributions be made by the homeowner, which are illegal in a short sale. So be sure to talk to someone knowledgeable in lending before deciding on a course of action!
Many borrowers, although familiar with their loan officer or Realtor, ask, “What is escrow?” It is defined as a third person with whom a contract is deposited – kind of a neutral party, a referee for a real estate transaction.
For a contract to be valid it needs two parties, so part of the contract is that both parties agree who will do the escrow, the holder of their contract. In real estate, escrow is a third party that the buyer and seller, or in the case of a refinance the borrower and the lender, use to transact funds from one party to the next; escrow is also referred to as the settlement agent.
Given instructions agreed to by both parties, the escrow holder agrees to accept funds from the buyer, and the buyer's lender if necessary, and then after paying costs for other services involved in the transaction, deliver the funds to the seller once all promises are fulfilled in exchange for a grant deed from the seller that is delivered to the buyer. Escrow is neutral and has no agency contract with the buyer or seller, its agency is with the transaction.
Escrow plays a vital role in real estate transactions since large sums of money flow through escrow companies on a daily basis for purchase and refinance transactions. Escrow is not only charged with making sure the initial instructions are followed but also that neither party is able to change the transaction without the consent of the other. At closing, escrow is responsible for disbursing funds to all the parties and services involved in the transaction, refunding overages to buyers or borrowers, pay fees to termite, title, home warranty, lender and themselves, and transmit the net proceeds to the seller.
Lastly, after the closing, escrow provides a very detailed accounting of all funds received and disbursed to all parties. A good escrow officer and company are like a good ref in a soccer match – you don’t really notice them unless they mess up.
As the Millennial generation (ages 18-34) continue to buy homes, they are often buying homes with others (in a non-married status). While lenders know that this is one path to them being able to afford a home, it is important that the borrowers go into the process with a few things in mind. And it is important for the borrowers to discuss the situation with the loan officer.
Usually this situation involves creating a pre-purchase agreement, although many couples who have just decided to live together are understandably reluctant to discuss how they will want to deal with breaking up the partnership. A pre-purchase agreement that the house must be sold if either partner aborts the relationship avoids some thorny issues that can arise when one partner stays with the house. But if the house is sold, how are proceeds to be divided?
One approach is to divide the net proceeds by each partner’s contribution to the equity in the house when it is sold. This should include the down payment, settlement costs, share of principal, and ongoing expenses. But often one of the partners might unilaterally work on improving the house, which would call for a higher share. The point is that the partners ought to agree on the general formula at the outset.
When one of the partners remains in the house, the terms of settlement are more complex, especially if the other partner’s name is included on the home loan. There is no sale price, so the partners must agree on an appraisal procedure, who will pay for it, and whether a real estate sales commission should be deducted from the valuation used in the settlement.
And what about paying off the departing partner, especially if the partner remaining in the house doesn’t have the money to pay off the partner who is leaving? A home equity loan is not possible unless both partners become responsible. The departing partner continues to be responsible for the mortgage. It is best to confer with a trained loan originator during the process. They can discuss future considerations in this situation.
It's that time of year. April 15th is fast approaching and borrowers are filing their income taxes. Depending on where a borrower is in a transaction, or in a timeline with negotiating a home purchase, the best advice to a buyer who has not yet filed their taxes is to wait.
The reason is that most lenders & investors require IRS form 4506-T as part of final loan approval to verify the borrower's income. Responding to requests for this form can take several weeks at this time of year, which for borrowers who just filed their taxes may delay their loan approval and closing.
So what are loan officers telling clients who haven’t filed their taxes with the IRS? Typically the borrower will qualify on 2014 income, and lenders can obtain 4506 results for 2014 and use that income to qualify. Borrowers should consider filing electronically. Even though it can (will) take several weeks from filing to get the results from the 4506 request, it is much faster than mailing in a return. If a borrower files an extension, they have until October 15th to file their final return. And if a borrower is in escrow and needs income from 2015 to qualify, they need to have filed already, or file immediately, to increase their chance of closing before the end of April.
Everyone should remember that the IRS is not always the speediest of respondents and if that 2015 income is needed for qualifying there is a very good chance the loan may be delayed waiting for those results. It is also important for borrowers to know that when it comes to documentation, every i must be dotted and t crossed. The days of limited or “no doc” loans are gone as investors want all information complete and verified.
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