Tag: downpayment

Cash Can Be a Dirty Word

Cash may be king, but in the mortgage world it can cripple.  How so?

A recent buyer and his agent got his offer accepted, so the next step for the buyer was to get to the title company and pay his earnest money.  In short order, he walked into the title company, handed them a money order for $1000, and walked out with a receipt for his earnest money.

As designed, the earnest money deposit is supposed to be credited toward the money needed to cover the down payment and the closing costs, right?  Well, in this case, that’s $1000 that we can’t use at all because the money order was purchased with straight cash, and cash can’t be sourced.  With underwriters, sourcing is sort of a big deal.

Why would the title company take this guy’s money and give him a receipt without saying anything?  Don’t they know they just screwed everything up?  The answer is more simple than you might think: the title company did exactly what the purchase contract said they needed to do, which was to take receipt of $1000 from the buyer for his earnest money – they didn’t screw up at all.

In the end, the buyer will get his $1000 back from the title company (it doesn’t disappear down a black hole), but in the meantime, he’s going to have to find a way to come up with $1000 of sourced money to add to what he already had ready for his down payment and closing costs.  In other words, if he was going to need $10,000 overall to cover what’s required for closing on his new home, he now needs $11,000 (for a while) because the money he paid to the title company can do nothing but sit as a place holder.

While he will, in fact, get his $1000 back eventually, he’s a buyer like most of us who might have a little difficulty coming up with an extra grand in a short period of time.  It’s going to make things very interesting for him (and for us), and it may delay things for everyone involved.  That’s the reason for this cautionary tale:

More often than not, when we get the contract, the buyer has already dutifully made her or his way over to the title company to take care of the earnest money (because good agents like yourselves have fully impressed upon them how important it is that they do it immediately).  As real estate agents, when you’re in the process of impressing them, tell them that cash is NOT a good thing in this particular case – tell them to go to their local bank and have the teller withdraw the money from their account to issue a certified check.  All of that is traceable and can be sourced.  The underwriter is a happy camper.

Even in those cases when we have taken the buyer through the entire underwriting process and gotten them pre-approved (not just pre-qualified), if we tell them about what to do with the earnest money requirement when the time comes, there’s about a .1% chance they’re going to remember that piece of very important advice.  You, the agent, are right there at the right moment: please take two minutes and walk them through the process – or IMPRESS upon them how important it is that they call us BEFORE they do anything else.  Two minutes could save two weeks . . . or an entire transaction (and your paycheck).

When You Don’t Have a Rich Uncle

What you are about to read isn’t for everybody – that sounds sinister, right? – but you really should read all the way through because you’re going to want to be prepared when the appropriate situation presents itself.  We’re talking about Jumbo Loans . . . well, sort of.  We’re really talking about coming up with the down payment and how that becomes a slightly larger feat when the purchase price starts climbing northward.

We have a partner who is looking to help your clients either come up with enough money for a 20% down payment or increase your client’s down payment so they can purchase a larger house.  Let me break this down for you:

The limit for a conforming loan is $484,350 as of right now.  That means any home that has a purchase price of $605,438.75 or higher is where this partner of ours is helping your client.  (Here’s the math: $605,438.75 – 20% for the down payment = $484,351, which is the point where the loan steps out of “conforming” land and into “jumbo” land.)

This partner of ours is NOT a lender; they’re an investor.  In other words, they’re not loaning your client the money to help with the down payment; they’re becoming an investing partner with them who will share in EITHER the gain or the loss of the change in value of the home.  There’s NO interest being charged, and there’s NO monthly payment – as I said, it’s an investment.  Let me be clear right here: I am not trying to sell this to anyone; I’m simply presenting you with an option that could be that extra help your client needs to purchase that dream home.

In broad strokes, here’s how it works:  they will invest between 5-10% to be coupled with your client’s down payment to total at least a 20% down payment on a home.  This could mean that your client brings 10% to the table, and they contribute 10%, so your client can buy that $750,000 home.  Or, let’s say your client has $150,000 for the down payment already, but the home your client REALLY wants is $815,000.  Our partner could come in with the additional money needed, and your client’s monthly payment for the $815,000 home would be the same as the $750,000 home.  In many cases, that extra 10% they can bring to the table is the difference between a great home in a great neighborhood and THE home in THE neighborhood.

Now, here’s how the investing partner makes their money – they’re not doing this for their health remember:  The home your client purchased for $750,000 you’re now selling for $850,000 ten years later.  The mortgage balance is $470,000, which means your client has $380,000 in proceeds.  The investor gets their initial investment of $75,000 plus 35% of the change in value of the home.  In this case, the home increased in value by $100,000, so 35% of that is $35,000.  All told, the investor gets $110,000 ($75,000 + $35,000) out of the proceeds of the sale.

Remember how I said they’ll share in your client’s gain OR loss?  Different scenario:  your client purchased the home for $750,000 with 10% down from their pocket and a 10% investment from these guys.  Five years later, your client needs to sell the house at a loss – it’ll only sell for $650,000.  The investor’s initial investment of $75,000 was for a 35% share of the “change in value”.  In this case, the change is $100,000 (in the negative), so they’re going to take a $35,000 loss against their $75,000 investment.  In other words, your client would only owe them $40,000.  If the negative change in value were more than $215,000, your client wouldn’t owe them anything ($215,000 X 35% = $75,250 > $75,000 – anything beyond the investor’s initial investment cannot be recovered).

There are other details in the agreement that range from time periods to fees, but I won’t bore you with those at this point.  If this is something you can see helping your client get into THAT home, I’ll be more than happy to sit down with you and your client and go over ALL the details so everyone’s fully informed.

In addition to this helping you with existing clients who are currently frustrated because they need that little extra something, this could help you start a new marketing campaign to find more of those clients who just need that little extra to help them get into the home of their dreams.  Also, you could use this tool as a way to attract more listings in these higher price points because you have a way to help them attract more qualified buyers.  Call me.  We can sit down and brainstorm other ideas where this could help.  Get me a 44-oz Coke, and I’ll be ready.

What You Lose When Saving

This is taken from an edition of Priority Pulse that I wrote almost four years ago.  You may think I’m doing this because I’m lazy or I spent the weekend doing something other than think about what to write for this week’s edition – and you’d be right on both counts – but this is something that needs to be repeated.  In fact, it’s something that we (real estate agents and mortgage folks alike) should be screaming from the rooftops.

Buckle up and get ready to have your mind blown! Okay, it’s not THAT mind blowing – some of you might even say, “well, duh” – but it’s still interesting.

The New York Federal Reserve’s economists recently published the results of a study: changes in down payment requirements have MORE influence over home buyers’ willingness to buy than changes in rates.

Surveying both buyers and renters, the Fed found that the effect of interest rates may be overrated when compared to even small changes in down payment requirements. The study found:

• Dropping the down payment from 20% to 5% increases the willingness to purchase, on average, by 15% among buyers and 40% among renters
• Decreasing the interest rate on a 30-year fixed-rate loan only raised the willingness to purchase by 5%, on average

Here’s what we should be putting in front of those folks who are sitting of the fence.  Right now, rates for an FHA loan are almost 1% lower than a conventional loan.  Even with mortgage insurance, waiting to save a 20% down payment as opposed to 3.5% will cost a buyer A GREAT DEAL.   Take a look at the numbers for a house with the purchase price of $200,000 with a 30-year fixed mortgage:

WAIT
$40,000 down payment
Total Loan Amt: $160,000
Interest Rate: 4.875%
Monthly Mortgage (P&I): $858.91

versus

BUY NOW
$7,000 down payment (3.5%)
Total Loan Amt: $193,000
Interest Rate: 3.875%
Monthly Mortgage (P&I) + Mortgage Insurance: $1059.03

No doubt $858.91 is better than $1059.03 for a monthly payment – that’s not what’s at stake here. The difference between those two payments is $200.12. In order for a person to save the additional $33,000 to go from a 3.5% down payment to a 20% down payment at the rate of $200.12/month, it would take just under 165 months – 13.75 years! – to get to that point, which is almost half the life of a 30-year mortgage.

For many prospective buyers, that additional $200 is significant, no doubt.  I’m not in favor of pressuring these folks into doing something that makes them feel uncomfortable, even if I think it’s in their best interest.  However, I would add this: in 13.75 years, where do you think interest rates will be for a 30-year mortgage, and will the type of house you want to buy still only cost $200,000?  Food for thought.

Financial Nearsightedness

 

Years ago when the Consumer Financial Protection Bureau was created, we had some wacko thought that part of the job of the folks filling its ranks would be to . . . protect the consumer.  In some people’s view, this would mean that builders of new homes would no longer be able to dangle the carrot of “free” incentives if the buyer would finance the purchase through the builder’s in-house or preferred lender.  To those same people, it just made sense that the CFPB was created to even the playing field and make it so that the consumer got the very best deal available.  Well, we were wrong.

Builders ARE allowed to offer incentives for using their in-house and preferred lenders despite the fact that sort of goes against the idea that the consumer is getting the very best deal available. And for most consumers, all they see is the incentive, and this computes to less money coming out of their pocket at closing – and they’re right (sort of).  The purpose of today’s article is simple: demonstrate how much money REALLY IS coming out of their pocket as time goes by.

The first example is a gentleman who is purchasing a new home for a price of $555,331.  He’s being required to put 10% down, or pay $55,533 out of his pocket at closing.  Enter the builder’s incentive of $5,000 to be credited against closing costs – who can argue with that?  In this particular case, he wants an interest-only loan, which means that he’s only going to pay interest for the first ten years of the loan – the principal doesn’t get touched if he doesn’t pay any extra in that 10-year period.  The in-house/preferred lender offered him a rate of 5.5%, which means that his monthly payment is going to be $2,290.74 – in one year, he’ll be paying $27,488.88; in ten years, at the end of the term, he will have paid $274,888.80.  We offered him a rate of 4.75% on the same type of loan, which means that his monthly payment is going to be $1,978.36 – in one year, he’ll be paying $23,740.32; in ten years, at the end of the term, he will have paid $237,403.20.  Yes, you’re doing the math correctly, ladies and gentlemen: for a $5,000 incentive at the front end, he’s going to pay $37,485.60 more over the term of the loan.  In one year alone, he’s paying $3,748.56, and in two years, that’s $7,497.12 (which is almost .5 times more than the $5,000 he “saved”)!  Believe it or not, he went with the in-house/preferred lender for the “free” $5,000.

Now let’s go with a slightly more subdued example. This woman is purchasing a home for $260,000 with a 5% down  payment – $13,000 – for a loan amount of $247,000.  The in-house/preferred lender offered a $3,000 incentive in exchange for a rate of 5.375% on a 30-year fixed mortgage.  This yields a monthly payment (principal & interest) of $1,376.96.  We offered a rate of 4.875% on the same loan type for a monthly payment (P&I) of $1,301.86.  So far, that’s not that big of a difference, right?  In one year, that’s a difference of $901.20 between the higher rate and our rate.  It will take 41 months (just under 3.5 years) of paying the higher rate to cover the $3,000 incentive.  In ten years, which is the average amount of time someone stays in a home, our rate would save her $9,012 – and yet she went with the builder’s in-house/preferred lender.

In both of these cases, $5,000 and $3,000, respectively, are sizable chunks of money that could cause some immediate “pain” in having to part with them – no argument there.  However, if these borrowers stopped for a moment and looked a relatively short amount of time into the future, they would see that they would easily recoup that out-of-pocket money AND THEN SOME. Obviously enough to afford an eye exam.

Don’t Wait for the Rate

 

Buckle up and get ready to have your mind blown! Okay, it’s not THAT mind blowing – some of you might even say, “well, duh” – but it’s still interesting.  The New York Federal Reserve’s economists recently published the results of a study: changes in down payment requirements have MORE influence over home buyers’ willingness to buy than changes in rates.

Surveying both buyers and renters, the Fed found that the effect of interest rates may be overrated when compared to even small changes in down payment requirements.  The study found:

1.Droppingthe down payment from 20% to 5% increases the willingness to purchase, on average, by 15% among buyers and 40% among renters
2.Decreasingthe interest rate on a 30-year fixed-rate loan only raised the willingness to purchase by 5%, on average

As buyers straddle the fence between BUY RIGHT NOW with a higher interest rate and WAIT AN UNKNOWN PERIOD OF TIME to save 20% of the purchase price, here’s an example to give them a push.  Take a look at the numbers for a house with the purchase price of $200,000 with a 30-year fixed mortgage:

WAIT: requires a $40,000 down payment for a total loan amount of $160,000.  At an interest rate of 5%, the monthly mortgage payment (principal & interest) would be $855.35.

BUY NOW: requires a $10,000 down payment for a total loan amount of $190,000.  At an interest rate of 5.375%, the monthly mortgage payment (principal & interest) would be $1059.20.

No doubt $855.35 is better than $1059.20 for a monthly payment – that’s not what’s at stake here.  The difference between those two payments is $203.85.  In order for a person to save the additional $30,000 to go from a 5% down payment to a 20% down payment at the rate of $203.85/month, it would take over 147 months (12.25years!) to get to that point, which is almost half the life of a 30-year mortgage–and who knows what home prices will be like 12 years from now!

For many perspective buyers, that additional $204/monthis significant.  We have a number of strategies to help make up that difference and get you into a home as soon as possible!

This is a reprint (with a few changes) from a few years back, but the message is still relevant today.