Author: loantucson

Commercial Real Estate Lending

Commercial Real Estate Lending - Luxurious Offices in ChinaAs a business owner, your top priority is to grow your business. Purchasing new property or renovating it is a great start in establishing yourself in the commercial world. However, you will need financing, and your regular home loans or mortgage will not work out.

With commercial real estate lending, investors and businesses can purchase or renovate business-related properties. Much like residential loans, they are secured loans where the property being purchased acts as the collateral.

If you consider a commercial real estate loan for your business, here’s everything you need to know before you step foot in the action.

This article takes you through commercial real estate lending, commercial loans, types of commercial real estate loans, qualifications, important loan ratios, repayment schedules, interest rates, and much more.

What Is Commercial Real Estate Lending?

Commercial real estate lending is similar to mortgage loans. However, they are given to companies to purchase properties for business purposes.

Commercial real estate is a property used exclusively for business prospects or as a workplace rather than a living space. It includes housing, retail sales, manufacturing facilities, medical facilities, restaurants, recreational parks, retail sales buildings (such as shopping centers and malls), warehouses, etc.

Sources for Commercial Real Estate Lending

Apart from a commercial bank, the following also act as sources for commercial real estate lending and provide capital:

What Is a Commercial Loan?

Just like with home loans, banks and financial institutions also provide loans on commercial real estate.

Commercial loans are typically secured loans where the property being purchased is used as collateral. They are designed to help companies purchase or renovate commercial real estate properties and refinance real estate debt on already-owned commercial property.

Commercial real estate loans are made to corporations or businesses that own and operate commercial estate. The large size of the loan poses a potential risk to the lender. Hence they require a more significant down payment when compared to residential mortgage loans.

How Does a Commercial Loan Work?

Much like your residential loan, every lender has different terms and accepts various risk levels. However, the repayment terms of commercial loans are much smaller. The term can range anywhere from 5 to 20 years. In this case, the amortization period is longer than the loan term.

For example: Consider a CRE loan with a term of 7 years and an amortization period of 30 years. Here, the borrower makes regular payments for the first seven years. Then finally, they make a balloon payment comprising of the remaining balance.

These loans are generally more expensive, with the down payments ranging between 20% to 30% of the purchase price. In addition, the interest rates are again high at 10% to 20% for most borrowers in the same line. However, loans backed by SBA tend to be cheaper at 7.75% to 10.25% depending on the size and length of the loan.

Importance of Commercial Real Estate Loans

Commercial real estate loans are a critical part of the economy. They are generally much bigger than the residential loans making for a bulk part of the income for commercial banks and other lenders. Furthermore, nearly all businesses seek financing to be able to operate firsthand.

Commercial real estate loans are actively sought for various reasons:

  • Companies seeking to purchase a warehouse, workspace, or manufacturing space
  • Businesses seeking for financing to acquire rental property
  • Housing development companies looking to fund a new development project

Qualifications for Commercial Real Estate Loans

Commercial real estate loans are not as easy to get as residential loans. Every lender has his own qualifying criteria. Here’s how you qualify for a commercial loan:

  • Good Credit History: To start with, you will need a credit score of 680 or higher. For credit approval, your history should be devoid of foreclosures, recent tax liens, recent bankruptcies, etc.
  • Low Loan-to-Value (LTV) Ratio: LTV ratio determines the amount of equity or collateral a borrower has in a given property. Those seeking a commercial real estate loan require a minimum of 65 – 80%.
  • Down Payment: A bank may expect a down payment of at least 30% for these loans. However, in the case of SBA loans, it is 10%. Keep in mind that a lower down payment relates to higher monthly payments.
  • Organized Paperwork: An organized application and the required documents may make the difference between your loan approval and rejection.
  • Business Entity: Commercial loans are available for entities and not individuals. So ensure that your business entity is set up before applying.
  • Joint Venture Loan: In case you are not able to secure one as a single entity, you can join forces with someone else and seek a joint venture loan. This would effectively make you both partners.

Make it a point to write down the qualifications of different lenders, both your bank and other online lenders, as you shop around. This helps you compare and choose the one with less stringent requirements.

Loan Repayment Schedules

Commercial Real Estate Lending Repayment SchedulesFor a commercial mortgage, you have plenty of repayment options, of which the fixed rate is the most famous. However, for a commercial real estate loan, repayment terms range between 5 and 30 years. If it is short-term financing, the payment term can be even less than a year. Moreover, it is typical for the amortization period to be higher than the repayment period and as high as 25 years.

In short, you pay monthly payments for the repayment term and then a final balloon payment at the end. Again, not all lenders allow you to pay the amount early. Here are some potential charges you may encounter:

  • Prepayment Penalty
  • Interest Guarantee
  • Lockout
  • Defeasance

Interest Rates and Fees

Commercial real estate loans have higher interest rates than mortgage loans averaging at 5 – 7%. SBA 504 loans provide a lower interest rate, below 3%. Depending on your loan type and structure, lenders may go lower than the average range.

Coming to fees, you may have to pay closing costs (appraisal, origination, legal, and application fees) and more. It can amount to 1 – 2% of the commercial loan amount. In addition to that, you may also have to pay a guaranty fee that can cover a portion of the loan. It can be as high as 3.75%.

Prepayment penalties and prepayment fees can also be costly, depending on the lender’s size and the financials of your business.

Read the fine print to understand how much you might be charged if you choose to pay off your debt early in a commercial real estate loan. Commercial real estate loans do not require private mortgage insurance, so that’s one less thing to worry about.

Important Loan Ratios

Not just commercial real estate loans, every loan is based on the loan-to-value ratio and the debt-service coverage ratio. These ratios help determine the loan size and the interest rate.

Loan-to-Value (LTV) Ratio

The LTV ratio measures the value of the loan against that of the property. Lenders use it to determine how much money they can lend.

  • LTV = Loan Amount ÷ Purchase Price

Commercial real estate lenders prefer an LTV of around 75 – 80%. However, according to the National Association of Realtors® (NAR), only 60% use it as a criterion for determining how much a business can borrow.

Borrowers with less LTV have a good chance at qualifying for better interest rates than those with higher LTVs. Another point to note is that there are neither VA nor FHA programs nor private mortgage insurance in commercial lending. In the absence of insurance, the lenders depend on the property in case the borrower defaults.

Debt-Service Coverage Ratio (DSCR)

A DSCR compares a property’s annual net operating income (NOI) with the annual mortgage debt service (including principal and interest). NOI is a company’s revenue minus certain operating expenses (COE), not including taxes and interest payments. The ratio helps the lenders determine the loan size based on the cash flow generated by the property.

  • DSCR = NOI of Property ÷ Debt Service
  • NOI = Revenue − COE

A lower DSCR is adequate for loans with a stable income or a shorter amortization period. However, for businesses with volatile income, lenders may require a higher ratio.

Types of Commercial Real Estate Loans

Commercial real estate lending is a broad topic; there are many financial structures offering loans. This structure attracts buyers with favorable terms and deals. There is practically a loan for every situation you find yourself in.

Nonetheless, these are the most popular types of commercial real estate loans:

Permanent Loans

A permanent loan is similar to a traditional mortgage. It is also the first loan acquired on a commercial property.

While you can obtain a loan from any commercial lender, they are not open for short-term needs. They come with a repayment term of 5 years or more and an amortization schedule.

SBA Loans

SBA 7(a) LoanThe US Small Business Administration guarantees loans for small businesses and other companies that qualify for the loan. They are typically called the SBA real estate loans. There are two loan programs under the SBA loans.

  • SBA 7(a) Loans: SBA 7(a) loans are provided by a single private commercial lender and have a lot of flexibility. Up to 85% of the loan is guaranteed by the SBA, which you can use to provide working capital and purchase inventory.
  • SBA 504 Loans: SBA 504 loans are offered through two lenders: a private commercial lender (50% of the project costs) and a certified development company (40% of the project costs). You may need to provide 10% as the down payment.

A point to note: Real estate investors are not eligible for an SBA loan.

Bridge Loans

Bridge loans are short-term loans with terms ranging from 6 months to 3 years. Small business owners waiting for long-term financing use this in the interim period. They can also be used by real estate investors looking to buy and flip investment property for short-term gains.

Hard Money Loans

Hard money loans are strictly short-term financing offered only by private companies and individuals but not your bank. The value of the property guarantees them. The term lasts between 3 months and three years because investors do not hold on to the property for long.

Owner Financing

Owner financing allows home buyers or real estate investors to purchase a home and pay the seller directly without availing of a mortgage. They are helpful if your credit score is low or you have a hard time verifying your income. They are also a welcome alternative when traditional lenders would not work with you.

How Much Will My Bank Lend for Commercial Property?

The amount that a bank lends depends on your contribution. For example, most financial institutions require a 30% down payment for a commercial real estate loan. In other words, your lender will consider lending you 70% of the property’s value.

Conclusion

Investing in real estate is one of the efficient ways to financial independence. It offers incredible returns and better tax breaks. In addition, real estate investors often look at commercial lending quite favorably since they give more control over the value of the assets.

Commercial real estate loans provide an excellent platform for small business owners to establish their own businesses. However, with so many loans available, you may want to shop around for suitable financial options and lenders for your needs.

Compare each loan, the terms, and the repayment period firsthand. Also, look at the fine print for the prepayment penalty (if any). Taking time to look around can help you find the right loan for your business.

Priority Lending LogoPriority Lending, LLC has been providing commercial real estate loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started.

Unmarried Couples Buying a House

Unmarried Couple Buying a HouseEvery year the number of cohabiting is increasing. According to the US Census Bureau, there were around 18 million unmarried couples living together in 2016 (a 29% jump from 14 million in 2007), and one can only assume that the count has been increasing steadily.

Another research by the National Association of Realtors states that 9% of the homebuyers are unmarried couples.

It looks like more and more unmarried people prefer to buy houses together and not wait for marriage. However, there are many risks associated with buying a house jointly with your significant other, especially if you are not married.

There are many factors, both financial and economic, that couples need to consider before taking such a big step.

This article takes you through the information you need to know about buying a house together as unmarried couples, mortgage loans, and a few tips to help protect yourself in case of any fallout.

Can an Unmarried Couple Buy a House Together?

Yes! You can buy a house with your partner without being married. However, unlike married couples, you may want to spell out how much percentage of the house each of you holds.

You can own the home as sole ownership, joint tenancy, or tenancy in common.

Moreover, the terms of the mortgage may also vary. While few lenders allow the couples to apply for mortgages together, the others consider you and your partner as individual entities.

Joint Home Ownership: Married Couples vs Unmarried Couples

Joint ownership happens when more than one person holds the title to a property, in our case, a home. They enjoy equal rights.

Married or not, homeownership can be a decades-long obligation that should not be taken lightly. When done right, you end up with a home and good equity and credit score. But, on the other hand, you may also end up in a financial nightmare should something go wrong.

The most significant advantage is that you can easily afford a home (especially in the current economic situation) when there is someone else to shoulder the burden. With two incomes, you can easily save for a downpayment and also pay the monthly bills that come with a home.

There are a few disadvantages to owning a home along with a significant other. Firstly, you would be caught in a legal and financial crisis if your partner decides to walk away. You would have to shoulder the mortgage and bills alone until legal action is taken.

Buying a House as an Unmarried Couple

Buying a house along with your partner is a risky business. It is a major commitment that should not be taken lightly. You should take some extra steps to protect yourself.

Here is how you can buy a house as an unmarried couple in five simple steps:

Be Aware of the Risks - Person Jumping Over PitfallBe Aware of the Risks

Buying a house as unmarried couples carries more risk than their married counterparts. The reason being, there are laws that stipulate the division of assets in the case of divorce or death, but the same does not exist for an unmarried couple.

The situation becomes even riskier when two people are on the deed but one person on the mortgage. In this case, if the partner fails to make payment, the partner on the deed can lose their home and any money they put into it.

Furthermore, it can be challenging to qualify for a mortgage.

Financial Transparency

The financial health of the couple is crucial for a mortgage application. So, you should sit together as a couple and be transparent about your finances, including credit card balances, student loans, car payments, etc., before making any decisions.

  • Credit Score: The credit score, along with the information in the credit reports, play an essential part in getting the mortgage approved.
  • Debts and Income: Debt-to-income ratio helps the lender decide on your financial stability. Lower the DTI, better your chances are of getting the loan.
  • Expenses: Discuss with your partner how much he/she can put forward for the down payment, mortgage payments, closing costs, bills, etc.

In case both the partners apply for a mortgage together, they are equally responsible for the payment-so missing payments can affect the credit scores for both. So a better idea would be to save for 3-6 months’ worth of payments before you commit to buying a house.

Mortgage

Depending on the financial situation, you can either apply for a mortgage together or have one person’s name on the mortgage. The former is ideal if you and your partner have good credit scores, while the latter works if either one of you has a bad score.

In short, the partner with solid financials, credit score, and DTI gets better mortgage terms and mortgage interest rates.

Choose the Right Type of Ownership

One final thing you may want to come into an agreement on is the deed. The deed is a formal document that dictates the title of the home. You have three options when it comes to deeds:

  • Sole ownership – Ownership is where one partner’s name appears in the title. It can be helpful when one person has poor financial standing. However, the person whose name is not on the deed does not have any legal rights and would have to address the same in a cohabitation agreement.
  • Joint tenancy – Joint tenancy is when both the partners own an equal share in the home and are co-owners of the property. It ensures that you and your partner have equal rights to the home.
  • Tenants in common – With tenants in common, the share is decided by how much each person is paying into the house.

You may want to consult with a real estate lawyer to find the best way to hold title for your situation.

Cohabitation Property Agreement

A cohabitation property agreement is essentially a contract that dictates what happens when the relationship breaks up. It protects the financial interests of both partners. This is something you need to discuss and come to an agreement with your partner.

The agreement includes:

  • Share of the property
  • Type of ownership
  • Share of expenses
  • Division of assets
  • Buyout agreement
  • Dispute process

Questions Unmarried Couples Should Ask Before Buying a House

Questions Unmarried Couples Should Ask Before Buying a HouseAccording to a Coldwell Banker Real Estate survey, one in four unmarried couples between the ages of 18 and 34 buy a house together.

Despite that, unmarried couples have more to lose when their relationship comes to an end, especially when there is a house at play.

Since you are not treated the same as married couples, you need to ensure that you cover all your bases. So here are some important questions you may want to ask.

What Are the Laws for Unmarried Couples?

Law treats unmarried couples like individuals; hence it is up to the couples to decide how the home is handled in case of separation or death to mitigate the risks.

Prepare a cohabitation property agreement with the exit strategy, buyouts, how that property should be divided, etc.

Who Is Applying for the Mortgage?

The mortgage rates are dependent on the credit scores of both partners. So, if one person’s score is lesser, it will impact the interest rates. Hence it is best for the home loan to be on the person with a good credit score as well as DTI ratio.

What if One Partner’s Name Is Not on the Mortgage?

There isn’t much you can do if your name is not on the mortgage, but you can ensure that it is on the title of the house. However, the person who is on the mortgage is responsible for the payments.

How Will You Divide Ownership and Equity?

If the financial burden is divided evenly, the title and equity also follow the same path. However, it is not always the case. In this situation, the person who contributes the most financially has a better share.

Who Gets the House Post-Breakup?

Assets can complicate a breakup. For example, in the absence of a cohabitation property agreement, you can buy out the other partner’s share of the property, or both the partners can sell the house.

Sometimes the bank can also force the sale of the property. The same happens when one person dies. However, to take the partner’s name off the mortgage, you’d have to refinance it in your name.

How Will You Handle Household Repairs and Upgrades?

As much as this looks silly, you cannot know the compatibility as co-owners unless you address these questions. Again, these are better addressed in the cohabitation property agreement.

Things to Consider When Buying a House with Your Partner

There are a few key factors individuals may want to consider before buying a property as unmarried couples:

  • Evaluate your relationship. Are you ready for buying a house together? What would happen if you break up?
  • Ensure that you are buying a house for the right reasons.
  • Who is applying for the mortgage? The person with a better income, credit score, debt to income ratio, and financial standing will qualify for better mortgage terms.
  • Choose the ownership title that’s right for you. i.e., sole ownership or joint tenancy or tenancy in common
  • Get a cohabitation property agreement. Ensure that you plan for every scenario.
  • Determine how the costs such as property taxes, homeowner’s insurance, and HOA fees are split.
  • Discuss the future plans before making any big decisions related to your home.
  • Even if you live together, you cannot file your taxes jointly. You may have to either split what you have paid towards mortgage interest, property taxes, and mortgage insurance or let the person with the highest income take all the deductions.

Tools and Tips for Unmarried Home Buyers

  • Tips for Unmarried Couples Buying a HouseKeep track of your finances and maintain written records. Any cohabitation property agreement you may have is useless unless you have proof of who paid for what.
  • Consult with a real estate lawyer and ensure that you have the proper protection in place in case of any breakup.
  • Plan for worst-case scenarios. Ensure that you have a backup plan.
  • Consider opening a joint bank account where both the owners contribute an equal sum every month.

Types of Mortgages for Unmarried Home Buyers

Any two or more people can buy a home together and not significant others. It can be friends, colleagues, business partners, or any other qualifying individuals. You and your partner can apply for any home loan: conventional, FHA, USDA, or VA.

Here are the different mortgage options available for unmarried home buyers:

  • FHA – Considering a downpayment of just 3.5%, FHA seems to be the better option for most first-time home buyers. However, to qualify for the same, it should be the primary residence for both of you. With FHA, you need not have joint bank accounts. You also need not show proof of living together before applying for the mortgage.
  • USDA – You may want to consider the USDA loan if your property is in a rural area. Eligible properties may even get 100% financing.
  • VA – While VA allows an unmarried couple to apply for a loan, you may not get 100% financing.
  • Conventional Loans – If you and your partner have a good credit score and a 20% down payment, consider a conventional mortgage.

How to Protect Yourself When Buying a House with Your Partner

What if the relationship doesn’t work out? What if the other partner dies?

When buying a home jointly, having both the partners’ names on the title is not enough to protect you. Here’s how you protect yourself and your investment in case of any separation or death.

Before you start house hunting as a couple, get your partner’s financial information including credit cards, student loans, and other debts. You may want to make sure he/she is ready to take on the financial burden that comes with owning a new home.

What kind of title you want? If your title says tenants in common, the house will not transfer to you on your partner’s death. To ensure that you both are protected, the title should read joint tenants or tenants with the right of survivorship. With either of these, the survivor will inherit the home along with the mortgage, and other expenses on the death of the other.

Consider having a cohabitation property agreement with your partner. It should cover the legal ramifications of eventualities like:

  • What if you break up?
  • What happens if one partner dies?
  • How do you split the monthly payments and other bills?
  • What if one person wants to sell the home?

Conclusion

Owning a home is always an investment that pays back a long period of time. It is gratifying when done correctly.

Buying a house is a long-term venture that requires a lot of time, care, and thought process before committing. You both should be able to view it as a financial endeavor rather than being an emotional one.

You should be willing to do the homework and research your part before jumping on the bandwagon. Ensure that you consult with professionals every step of the way. That way, you can avoid potential pitfalls and move forward. Ensure that you know what you are getting into, trust your significant other, and plan for the worst-case scenario.

Priority Lending LogoPriority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

Second Mortgages

Second Mortgages2020 was a financially sound year for homeowners since the home equity has an average gain of $26,300 last year. According to Corelogic, an average homeowner has more than $200,000 in equity.

The pandemic brings in unprecedented financial difficulties, during which time you may need access to a large amount of money. Consider tapping into the equity and take out a second mortgage.

This article walks you through the inside workings of second mortgages, closing costs, interest rates, pros and cons, qualifications, requirements, the application process, and much more.

How Does a Second Mortgage Work?

The second mortgage is a loan similar to the one used to purchase your home. The reason it’s called a 2nd mortgage is that it is next in line to be repaid after your purchase loan.

Since it uses your home as collateral, the second mortgage lender can repossess your home if you fail to repay. In that case, the loan used to purchase your home is the first one to be repaid. The remaining, if any, will go towards the second mortgage.

Second mortgages tap into your home’s equity, which is the current market value of your home minus the loan balance. In most cases, lenders would let you borrow 85% of the home equity, depending on your credit score.

And, since the second mortgage loan is taken against your home, it has a lesser interest rate than other loans such as personal loans or credit cards. Depending on your choice of loan, it can either be a fixed rate or variable rate.

Types of Second Mortgages

The common types of second mortgages are:

  • Home Loans: The lender gives you a lump sum where you get the entirety of the loan amount to use as you wish. The loan is then repaid in fixed monthly payments. Generally, they come with a fixed interest rate and a fixed term.
  • Equity Lines of Credit: The lender gives you a line of credit from where you draw a certain amount of money as and when you wish, just like a credit card. Line of credit usually comes with adjustable rates.

Since they are secured against your home, they are cheaper than most loans but not as much as the first mortgage.

Is a 2nd Mortgage a Good Idea?

Second mortgages can be a great source of money when you require a lump sum at a reasonable rate of interest. They are a good idea when used for things that have long-term value.

Most people take out a second mortgage for things that have a long-term value, such as:

  • Home Improvements – You can proceed with home improvements such as a kitchen remodel or bathroom renovation, etc.
  • Debt Consolidation – The loan gives you the chance to pay off high-interest loans such as student loans, credit cards, etc.

However, it is not advisable to use it for inconsequential things that do not add value.

Closing Costs on Second Mortgages

As with the primary mortgage, the second mortgage also has closing costs, though reasonably reduced. Even then, it amounts to 5-6% of the loan amount.

For loans up to $200,000, the lenders charge a “flag” title insurance policy with a flat fee of $125 and a sub-escrow fee which is $225 -$250.

Additionally, the standard fees such as the recording fees, notary fees, and the payoff fees amount to $60-$150. And then, there are the administrative fees charged by the lenders that come to $250.

Apart from that, you may have to pay an additional cost of $300 – $400 if an appraisal is required. Finally, the credit fees come to $15 – $30.

How Much Home Equity Do You Need for a Second Mortgage?

Though equity requirements vary, second mortgage lenders prefer that you have a 15% – 20% equity in your home.

You can borrow up to 85% of the home’s equity, which is 85% of your home’s value – any loan balances. For example, consider your home’s worth to be $300,000 and loan balance $200,000.

85% of $300,000 = $240,000.

2nd mortgage would be $240,000 – $200,000 = $40,000.

Does a Second Mortgage Have Any Tax Benefits?

The tax benefits primarily depend on the kind of debt.

When your second mortgage is used to buy, build or improve a primary/second home, it becomes a home acquisition loan. If the home acquisition debt and the home equity debt combined together come up to $1.1 million, you could deduct all your interest in that particular year.

However, if the home acquisition loan is $2,000,000, you’ll be able to deduct only half of the total interest paid that year.

Can You Get a Second Mortgage to Buy Another House?

Yes! You can use a second mortgage to buy another house. Tapping into the home equity allows you to enjoy better rates of interest and tap into the financial resources that lay untouched otherwise.

If your second home is an investment property, home equity is often the least expensive option since they have lower interest rates.

Are Second Mortgage Rates Higher than First Mortgage Rates?

Second mortgages have higher interest rates than the first mortgage. This poses a risk to the lenders since they are second-in-line to be paid in case of foreclosure.

However, a second mortgage has lower interest rates than other unsecured loans such as personal loans and credit cards.

How Much Does It Cost to Get a Second Mortgage?

Second mortgages cost 2%-5% of the mortgage amount both in upfront costs and those that are paid over a period of time. Most of these are similar to that of the primary mortgage but are paid separately since they are considered to be separate loans.

Pros and Cons of Second Mortgages

Second mortgages, as with every other loan, come with their own pros and cons. Talk with your lender and consider the risks to make sure the second mortgage loan is the right one for you.

Pros of a Second Mortgage

Lump-Sum: Second mortgages allow you to borrow a significant amount of money. Since the loan is secured by your home, you would be able to borrow much more than unsecured loans.

Lower Interest Rate: Second mortgages have lower interest rates than other loans since they use real estate as collateral which reduces the risk to the lender.

Tax Benefits: In certain cases, the interest accrued will be eligible for tax benefits. According to the Tax Cuts and Jobs Act, you’ll be able to claim deductions if used for home improvements.

No Limits: Second mortgages give you the freedom to use the mortgage amount as you wish. You can use it for big purchases you wouldn’t be able to afford otherwise.

Cons of a Second Mortgage

Risk of Foreclosure: Since the loan uses your home as collateral, you run the risk of foreclosure if you fail to pay it back.

Closing Costs: Second mortgages can be expensive, much like your primary mortgage. The closing costs can end up in thousands of dollars in origination fees, appraisals, credit checks, and more.

Interest Rate: Though the rate of interest is much lesser than your credit card, it is higher than your purchase loan.

Undue Pressure on Your Budget: A second mortgage adds to your debt burden even with your low-interest rate. It can place pressure on your budget, especially if you are living paycheck to paycheck.

Requirements for Second Mortgage

To qualify for a second mortgage in the form of a home equity loan or HELOC, you’ll need:

  • A credit score of 620
  • A debt-to-income ratio of 43%
  • A decent amount of equity

Below is the paperwork your lender will require before closing the loan:

  • Copy of the deed to the property
  • Tax appraisal
  • W-2 (last 2 years)
  • Tax returns (last 2 years)
  • Paystub (current)
  • Proof of income (child alimony, disability payments, child support, lawsuit settlement, inheritance, and other sources of income)
  • Copies of bank statements (3-6 months)
  • Open credit accounts
  • Current loan statement
  • Homeowners insurance

Apply for a Second Mortgage

In terms of getting a second mortgage, the application process is similar to a primary mortgage; you do not need any home appraisal or inspection. However, you may need an assessment to determine the current value of your home.

To start with, talk with your lender to check if you are eligible for other financing options, including refinancing.

Here’s the application process for the second mortgage.

  • Calculate the equity in your home and how much you can borrow.
  • Gather all the required documentation, preferably in digital format, to speed up the timeline.
  • Shop around different lenders for better rates. Compare the lenders and financing options for your situation.
  • Once you finalize the lender, make sure you fill out the application with the correct details, or it may delay the approval.
  • Fax or email the documentation to save time and expedite the process.
  • Letting the lender know the reason for the loan may help with the approval process.
  • Your lender may want to conduct an appraisal and inspection if it hasn’t been done in the last six months.
  • Review the disclosure documents and verify the payment terms.
  • Ensure that the terms of the loan match with what you have agreed to.

Piggyback Loans

Second Mortgages - Piggyback LoansPiggyback loans — also known as 80-10-10 loans — are an entirely different kind of second mortgage. Rather than borrowing against your home equity, you get a loan piggybacking the primary mortgage. In short, you’d be using two mortgages to purchase your home. The first mortgage typically covers 80% of the home price, and the second mortgage covers 10%. The remaining 10% is covered by your down payment.

It is generally used to cover parts of the down payment and avoid private mortgage insurance (PMI), as well as avoid taking a jumbo loan where the interest rates are significantly higher.

First Mortgage vs. Second Mortgage

Similar to a first mortgage, a second mortgage is also taken with your home as collateral.

The first mortgage is the primary loan that you take to purchase your home. The interest rates are significantly lower than many other loans. Additionally, they are also tax-deductible. However, the closing costs may be high and needs to be paid upfront.

The drawback is that you do not possess the ownership of the property until you pay back the loan. And defaulting on the monthly payment can lead to foreclosure, with the primary mortgage being paid first.

On the other hand, the second mortgage is taken on the home equity in addition to the primary mortgage. The rate of interest is high when compared to first but lower than the unsecured loans.

Second Mortgage vs. Home Equity Loan

Home equity loans are pretty similar to second mortgages that many confuse between the two. They are alike in every aspect, including that they use home equity to finance the loans. You’ll need to retain 20% home equity to qualify for both these loans.

The rate of interest is fixed so are the payment terms. You make a monthly payment, failing which you will face foreclosure. A home equity loan is available in a lump sum similar to the second mortgage.

Second Mortgage vs. Home Equity Line of Credit

Second Mortgages Versus Home Equity Lines of Credit (HELOC)A home equity line of credit (HELOC) is also quite similar to a second mortgage in that it is financed by home equity. It has a revolving credit line from where you can borrow money and then make monthly payments, just like your credit card.

A HELOC also has a draw period, say ten years, where you can borrow money. After the draw period comes the repayment period, during which time you have to pay it off. Once you have paid it back, you can use the money on your credit line repeatedly without applying for more home equity lines of credit.

Like the second mortgage and the home equity loan, your home is at risk of foreclosure if you miss monthly payments.

Conclusion

By taking out a second mortgage, you tap into the home equity to finance your home improvements, big purchases, and such. While it has its risks, the lower interest is an attraction.

You can use a second mortgage to make substantial improvements to your home, settle debts on loans that carry a higher interest rate. Like the purchase loan, it is taken against the real estate, which means that the first mortgages have priority when the borrower defaults.

You need not take out a second mortgage from the same lender as your primary loan. Shop around and find the lender who carries the best rates. Also, look around for other loans appropriate for your financial situation.

Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

What Is a Gift of Equity?

Gift of EquityTypically buying a home involves the most significant investment that ordinary people often make in their lives. Homeownership is an expensive dream for anyone with average earnings. On top of that, the real estate market keeps growing each year, making it very difficult for people who barely cover their rents to even think of becoming homeowners. Home for these people has become far beyond their reach.

Then are those fortunate people who, after years of savings, make it to the home-buying phase, and finally, become first-time home buyers.

For all those who dream of having a home sometime in their lives, the “Gift of Equity” falls as a blessing. 

What Exactly Is a Gift of Equity?

The gift of equity refers to when a homeowner sells their home, usually to a close family member, at a price much below the home’s original market value. And the difference between the house’s actual cost and the price at which it’s sold is known as a gift of equity. It is commonly seen that a lot of lenders allow the equity to be used toward a down payment.

How Does a Gift of Equity Work?

The most commonly seen gift of equity is when parents wish to sell their home to a child for a low price. As already mentioned, most lenders count the gift as a down payment on the house. The residence that the lender wishes to sell could be either their primary or a second home.

The best advantage that the gift of equity offers is that it helps the buyer reduce or even eliminate down payment requirements, which makes it much easier for the recipient to secure a home loan.

Examples:

  • Your relative’s home has a value of $500,000 per verified appraisal
  • They want to sell that to you for $400,000
  • You are offered $100,000 in equity, which is 20% in home equity instantly
  • You take out a home loan of $400,000

Now, let’s suppose that your relatives wish to move out of their residence to another place and desire to downsize. They’ve always wanted to give that old home to you, but the new home that they want to move into is out of their price range, at least from a down payment perspective. So in this scenario, they don’t just merely hand over the keys to you; they offer you the gift of equity by selling it for a lower-than-market price.

According to the appraisal, the home is worth $500,000 at the present moment, but your relatives are offering you $100,000 in gifted equity. Therefore, the home is being sold for $400,000, meaning your relatives will walk away with the lower proceeds once the loan funds. But because the property appraises for $500,000 you can take out a loan of $400,000 and instantly acquire 20% equity.

The loan would be priced at 80% LTV, low enough to avoid any mortgage insurance. And this will also aid you in acquiring a more competitive mortgage rate. This creates a win-win situation for all the parties involved and helps you to resolve the down payment hurdle.

Requirements

To acquire a gift of equity, there are specific rules that one must follow. The first requirement is writing the gift of equity letter, which is signed by the seller and buyer. The letter states the fact of the agreement and is signed by both the seller and the buyer. Along with an equity letter, other things that are required include:

  • The seller must officially complete the paid appraisal on the home.
  • The relationship between the buyer and the seller must be disclosed in the loan file.
  • The gift of equity can be utilized on a primary residence or second home but not on investment properties.
  • The appraisal must include the price of equity for which the home will sell for.

Learn how to give equity as a gift.

Frequently Asked QuestionsPeople Also Ask:

Is a gift of equity a good idea?

A gift of equity alleviates the burden of a 20% down payment on your child, which would otherwise take several years. By paying the full 20%, they are also saved from the additional PMI Fees on each mortgage payment.

Can you do a gift of equity on a conventional loan?

Yes, you can do a gift of equity on a conventional loan since conventional loans allow that. But one can only acquire the gift of equity if the seller of the property sells to one of his family members. Anyone could easily open a conventional loan for only $80,000 to buy the property. And this 20% in gift equity would count as your down payment.

How much equity can you borrow from your home?

Generally, anyone can easily borrow up to 80% of their home’s value in total. So, he or she may need more than 20% equity to take advantage of a home equity loan.

What is the difference between equity and down payment?

Equity refers to the remaining amount of the property’s total price, which is not covered by the loanable amount. Whereas both the seller and the buyer usually calculate down payment to finalize the purchase.

Conclusion

To the majority of people, a gift of equity looks like the next best thing to inheriting a home. But it is, however, important to consider a few things before going through the process.

One of the most critical factors that one must not neglect is the effect of a gift of equity on taxes. It is important to note that anything over the current 2018-2019 limit of $15,000 must be declared and taxed.

Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

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Types of Housing Loans: Choose the Right One

Housing Loans

Types of Housing Loans: Choose The Right One

Are you worried about figuring out the best type of mortgage to buy your dream home?

If yes, then stick to this post until the very end, and you’ll soon realize that choosing amongst the different types of home loans isn’t that problematic. When you wisely choose between the different types of mortgages, you could easily save a lot on your down payment, fee, and interest.

You just need to know the types of loans available, and if you’ve budgeted a down payment amount, reviewed your credit, then you would have more clarity for choosing the right home loan plan for you.

Fixed-rate Loan

It is a type of the most common conventional loan, where the life of the loan is typically around 15-30 years. In this type of loan, you are supposed to pay a single interest rate every month until you completely pay the loan. A Fixed-rate loan also includes a down payment.

Eligibility Criteria

Recommended for homeowners who possess a permanent job and are comfortable paying a fixed amount of savings every month. If you plan to stay in the same house as long as you are paying the loan amount, this kind of loan would be best suited for you. Anyone who plans to move after a little while must consider other loan options.

Adjustable-rate Mortgage

Adjustable-rate mortgages (ARM) offer mortgage interest rates lower than a fixed-rate mortgage for a certain period, such as five or ten, rather than the entire life of the loan. Unlike Fixed-mortgage rates where the interest rate is adjustable, only the initial interest rate is fixed for a certain period of time. After this initial period, the interest rates reset at yearly or even monthly intervals. ARMs are also referred to as variable-rate mortgages or floating mortgages.

Eligibility Criteria

It is well suited for home buyers with lower credit scores. Because it is generally not possible to get reasonable rates on fixed-rate loans if your credit score is low, therefore an adjustable-rate mortgage can help push those interest rates down enough to put homeownership within your reach.

This type of loan will also be an excellent option for you if you wish to move and sell your home before the fixed-rate period is up. The only problem with ARM is that your monthly payments can fluctuate.

FHA LoanFHA Loan

Are you bothered about the down payment amounts involved in different mortgage types? Then FHA or Federal Housing Administration loan is for you. With the help of this loan, you can borrow as much as 96.5% of your home’s total value. Unlike other typical loans that involve at least 20% of your home’s purchase price as the down payment. With an FHA loan, you’ll need to make a down payment of just 3.5%

Eligibility Criteria

FHA is usually recommended to homebuyers with very meager savings. To qualify for this loan, buyers must have a credit score of at least 580. Even If your credit score falls between 500 and 579, you can still apply for an FHA loan, but you’ll have to make a 10% down payment.

VA Loan

VA loan could be the best alternative to a conventional loan if you have served in the United States military. Veterans that qualify for a VA loan easily bag their sweet home with zero down payment and no mortgage insurance requirements.

Eligibility Criteria

The US Department of Veterinary Affairs backs the VA loans, and therefore VA has strict requirements for people to qualify for it. If you are active in military service and have served for 90 continuous days, you will be eligible for this loan type.

If you want to know more about the criteria for a VA loan, proceed to this post.

USDA Loan

The USDA Rural Development loan is designed primarily for families residing in rural areas. It is a Government-backed loan in which the government finances the entire 100% of the home price. USDA-eligible homes need no down payment and are offered discounted mortgage interest rates to boost.

Eligibility Criteria

People living in rural areas who are facing financial issues can access USDA-eligible home loans. These home loans are particularly designed to bring homeownership within easy reach with affordable mortgage payments. To comply with the USDA loan, your debt cannot exceed more than 41% of your income. Also, you’ll have to purchase the mortgage insurance with the FHA.

Frequently Asked QuestionsPeople Also Ask

  1. How many different types of housing loans are there?

There are a total of 8 types of mortgage loans for buyers and refinancers. These include fixed-rate, FHA, VA, adjustable-rate, USDA, interest rate mortgage, and Jumbo mortgage.

  1. What are the 4 types of housing loans?

The 4 main types of personal loans are-

  • Unsecured Personal Loans
  • Secured Personal Loans
  • Fixed-Rate Loans
  • Variable-Rate Loans
  1. Which type of loan is the cheapest?

The secured loans typically offer the lowest interests as compared to unsecured loans. The reason being lenders may consider a secured loan to be lesser risky as there’s an asset that backs up your housing loan.

Conclusion

Many new home buyers get confused while choosing the right mortgage plan, as there are several options to choose from. One best tip to make this process a bit simpler would be to figure out certain things. Nailing down things like your budget and down payment and reviewing your credit score will help you have a better idea as per your requirements.

Related to housing loans: Mortgage Calculators