Tag: options

Take a Walk on the Wild Side

FHA loan

Once in a while, someone will ask me to name my favorite loan type.  VA?  Conventional?  FHA?  USDA?  My answer: it’s none of those; my favorite type is one that is CLOSED.  That was cheesy, for sure.  I felt my eyes rolling as I typed it.  Sorry about that.

Regardless of the eye rolling and the groaning, it’s the truth.  If the loan is closed – no matter which one got us to that point – that means the client was able to reach their goal, long or short term, and they can move on to the next project/passion in their life.

Quite often, though, what I do get from a number of people is the attitude that an FHA loan is a second-class citizen in the land of loans, and that couldn’t be further from the truth.  Sure, if you’re buying or selling a sizable property overlooking the valley, someone qualifying for an FHA loan isn’t going to be in your pool of prospects.  That’s not snobbery; that’s math.

Sometimes I get sneers from the borrower when I mention an FHA loan; sometimes it’s a look of “give me a break” from an agent when I tell them their client is going to use an FHA loan to purchase their home.  For buyers and agents alike, that really needs to stop – not because I’m a thin-skinned crybaby who’s starting to take it personally but because you’re missing out on more than one of the great benefits that the FHA loan has to offer.  Rather than don my buckler and shield and stand a mighty defense for this oft-maligned and misunderstood princeling of a loan product, let me show you some simple math.

Same borrower is qualified to purchase a $250,000 home with either an FHA or a conventional loan:

                                                                                                  FHA                         Conventional

Interest Rate                                                                               4.125%                     4.875%

Down Payment (%)                                                                   3.5%                         3%

Down Payment ($)                                                                    $8750                       $7500

Monthly Payment (P&I w/Mortgage Insurance)                $1359.22                  $1659.21

Money Spent in 1st Year                                                          $25,060.64               $27,410.52

Money Saved in 1st Year                                                          $2349.88                  —

Money Saved Each Year After                                                $3599.88                  —

Money Saved in Seven Years                                                  $23,949.16               —

Most first-time home buyers stay in their homes for seven years (or fewer), and then they move on to the next house.  Whether the buyer went FHA or conventional, in the first seven years of ownership, the mortgage insurance would still be in place on either loan.  The FHA loan, though, would allow them to have $300 more per month to spend on something else or save, and it’s always nice to have options, right!

If your mind isn’t quite completely blown, let me throw in this little stick of dynamite to finish off the job.  On the same $250,000 purchase, the only way to get the monthly payment on a conventional loan to be almost identical to the FHA payment is to put down 10%, or $25,000.  Let me remind you: on the FHA loan, the minimum down payment of 3.5% is only $8750.  So, in order to get your monthly payment (principal, interest, and mortgage insurance) to be roughly the same, you would have to spend $16,250 MORE UP FRONT – all for the sake of having a conventional mortgage.

This may seem like overkill, but I’m going to do it anyway: remember, FHA loans allow a higher debt-to-income ratio than a conventional loan.  This means that if the borrower can qualify for a payment of $1659.21 (under conventional guidelines and a LOWER allowed DTI), that same borrower could use an FHA loan to purchase approximately $50,000 more house, or $300,000.  What agent wouldn’t want that type of “cushion” for search and negotiation purposes?   And what buyer wouldn’t want more options?

The next time you hear the letters FHA being bandied about, think of them as standing for Flexible Home buying Alternatives, because being conventional isn’t always the best thing to do in life – allow yourself to take a walk on the wild side.

For any more information or direction on this subject get in contact with Priority Lending LLC today.

Operation Homeowner

 

In the early days of Word War II, before the United States joined in the fray, England’s European allies were quickly and systematically falling to the Nazi war machine. England, on its tiny island, was the David to Germany’s Goliath. Germany had an unparalleled advantage with an abundance of technological, industrial, and intellectual wealth at their disposal. Winston Churchill, the Prime Minister of England in these dark days, had no illusions about the Nazis’ power and resolve, but he refused to bow to what so many of his fellow citizens thought was inevitable: the surrender of Great Britain’s sovereignty to Adolf Hitler. Mr. Churchill knew he was outgunned and outmanned, and he had few allies. The only way he and his nation were going to gain an edge over the Germans was through creativity.

One such occasion, Operation Postmaster, involved an island off the coast of West Africa that was under Spanish control. At that time, Spain was neutral in the war, and there were certain rules of what you could and couldn’t do in neutral territory. The Italians had parked a large ship in the island’s tiny bay and turned it into a listening post for German U-Boats to hunt and destroy England’s ships in those waters. Alongside the Italian ship were parked two German ships that acted as support. This was really a no-no, but the Spanish governor of the island looked the other way. It was absolutely critical that these ships and their operations be neutralized, but destroying them would be an act of war committed in a neutral territory – this would not help England’s cause. They chose a more piratical solution.

On an moonless evening, a small group of commandos slipped into the small island’s harbor aboard two tugboats. On shore, English spies threw a large party for the Italians and Germans so the ships were virtually unmanned. While the party was in full tilt, the commandos boarded each vessel, destroyed the moorings, and tethered the Italian ship to one tug and the two German ships to the second tug. On board the Italian ship was a small crew of men who had not gone ashore, and they were summarily taken prisoner. As the party continued into the small hours of the morning, the tugboats whisked the Axis ships away and towed them out to international waters where an English battleship commandeered them as spoils of war. No casualties, and no violation of the rules of war. If it could ever be proven, the worst the English could be found guilty of would be grand theft boat (is that a term?) or “piracy” – which would fit nicely with their heritage.

Creative thinking is crucial in this business. A gentleman excitedly called me recently to ask about a hard-money option to finance the purchase of a home that he wanted to fix and flip. When I told him about the terms, interest rate, and down-payment requirements of a hard-money loan, his excitement turned to gloom, and he almost hung up on me. I told him he actually had three other options that had better interest rates, better terms, and no down-payment requirements. Recently, I worked with a woman who is self employed and didn’t have close to the necessary income to purchase a home on her own, and a co-borrower wasn’t an option for her. I then told her about another option that would enable her to purchase a home in her current circumstances, and she was excited. What are these options at which I’ve hinted? They’re not secret, but they are creative – creative enough that a lot of other lenders wouldn’t think of them at all. Give me a call and let’s discuss your plan of attack!

Feelin’ Blue About Your Options? Good!

 

With my friend’s permission, I’m including an excerpt from a humor column he wrote a few years back.  I have a point, I promise, and I’ll make it below.

All told, I believe there are at least 764 shades of the color blue that are completely indistinguishable to my eyes, but my wife has the innate ability to differentiate each and every one.  Stranger still, when I tell her that Cerulean and Celestial look identical to me, she’ll say things like, “Oh, come on.  The Cerulean has way more red in it, and the Celestial tends to be more yellow.”  How can “blue” be red or yellow?  Aren’t we talking about the three primary colors, the basic building blocks of all other colors?

I would like to say that this truly shouldn’t matter to me, but I just spent my afternoon painting an entire wall Blue #429 – it has a name, I’m sure, but I dare not mention it for fear that one of you out there will send back to me a twelve-page thesis on the distinguishing characteristics of this particular shade of Blue.  Exhaustion has overtaken me, and I just couldn’t take that.  I’m not so exhausted from the physical labor involved; my arms are a bit fatigued, but that’s most likely due more to my personal lack of muscle.  The exhaustion, quite honestly, stems from my watching a non-stop virtual tennis volley between my wife’s two minds on the subject of the color.  “I think that will go really well with the couch and the black chairs.”  “That’s way too nautical blue.”  “It really softens up the room.”  “I was going more for the color of that pillow.”  Just when it seemed like one side had smashed it over the net to decide the match, the other would make an unexpected comeback that seemed just as devastating.  AmI rooting for the side that likes the color as it is?  Of course!  More to the point, though: I just want it over.  As I write this, I believe my wife’s in bed right now muttering pros and cons in her sleep.

Earlier today, before the paint was purchased and ushered into our home, I went on a hike with our oldest son. While we were out communing with nature and swatting at mosquitoes, I decided it was a good time to spring “the Birds & the Bees” talk on him.  AsI finished the short discourse, I asked him if it made sense, and he said, “Sort of.”  I could tell from his befuddled response that I had taken him completely by surprise and that he thought I had been out in the sun too long.  I got that.  So, I gave us both an easy out and said, “Well, when you start having questions along those lines, just ask me.”  His response to this was calculated and well delivered: “You wannathrow rocks at that flower on top of that cactus?”

I can honestly say that the details of my explanation were pretty straightforward but limited to fit the audience.  However, maybe the approach was all wrong.  Granted, I don’t want my children getting this type of information from other kids at school, television, or a former President of the United States – so I do need to get them the facts.  But while I’m preparing them to embrace the responsibilities of adulthood and married life, I should begin the discussion with the question: “How many shades of blue do you think there are in the world, son?”

Earlier today, I overheard one of our office veterans give one of our newer loan originators a great piece of advice: don’t let the borrower tell you in the beginning what type of loan is best for them.  He went on to explain that doing this is a disservice to the borrower because it limits what the loan originator is going to search for and provide.  Instead, the LO should gather as much information as possible from the borrower, even if it seems unlikely it will ultimately be needed.  It’s okay to have too much; it’s not okay to have too little.

If you get off the phone with your lender and feel slightly exhausted from all the questions, that’s a good thing: it means you’re going to have more options –maybe almost as many as there are shades of the color blue.