Buying a house from a family member, what you need to know!

Did you know that buying a home is frequently ranked one of the most stressful events in a persons’ life? Whether it’s making a big decision, such as finding the perfect home that checks off all your boxes, or something as simple as forwarding your mail to a new address, the whole process can feel overwhelming at times.

There are obvious ways to make the entire process smoother, like working with an educated lender that you trust and creating a budget that allows for a mortgage payment. On the other hand, some ways may seem to lessen the stress but can actually cause more in the end.

Let’s talk about buying from a family member.

Potential Red Flags

You know the house is in good condition, you’re tired of searching for a different property, and your Uncle Charlie swears he will give you a great deal… do you take it? There are plenty of benefits to buying from a family member. However, if you do decide to pursue a family-tied transaction, it’s crucial that you set clear expectations and put them in writing with either a purchase contract (similar to the format realtors use in the area you live) or “escrow instructions.” These instructions are similar to a purchase contract prepared in a for-sale-by-owner when a realtor is not involved.

Settling to the Benefit of One Party

Deciding on a price that both parties are happy with will likely be the most complicated and tricky parts of the transaction. One party might want a good deal on the home, and the other party may have to settle on a higher selling price. It’s essential that a clear price range is set from the beginning of the homebuying process.

Real estate agents will often perform a comparative market analysis for their clients to determine a price to list when selling a home. Although this is just an estimate, it’s still helpful in determining a reasonable selling price. So, if you don’t have an agent involved in the transaction, you may want to take advantage of various online tools to determine the home’s current value.

Homebuying Tip: If you find that each online calculator gives a slightly different number, don’t be surprised. The algorithms used to produce these estimates factor in other homes in the neighborhood, current home condition, location, recent sales on homes similar to yours, and more. Adding or subtracting even just one factor in the estimate could drastically alter the final number. Ideally, homebuyers should reference multiple online tools to determine a more accurate average.

Disregarding Property Condition

What is the current condition of the home? In most cases, if a house is ready for the market, most of the basic repairs are made. (Think of these as leaky faucets, chipping paint, or a broken door hinge.) However, significant repairs or renovations, such as a crack in the foundation, maybe needed within the next few years. Even a well-maintained home could have major structural issues. That’s why it’s imperative to conduct a full home inspection prior to executing a purchase agreement. A home inspector will identify these issues and provide an unbiased, objective opinion on the structure of the house. It’s better to address any potential problems with the home beforehand to alleviate conflict or roadblocks further into the process.

Not Having Adequate Representation

One cost-benefit of buying from a family member is avoiding the cost of a real estate agent and handling the transaction on your own, instead. On the other hand, when you choose not to work with an agent, you also lose the advice and representation of a seasoned professional. Using incorrect paperwork can lead to lead to legal issues and misrepresentation later on down the road.

Another alternative to using an agent is to hire a Real Estate Attorney to draft the legally binding paperwork. This option, however, still leaves the buyer and seller to handle the title and escrow process on their own. In most cases, utilizing a real estate agent is well worth the time and money spent.

Some Restrictions May Increase

Depending on the type of loan you’re approved for and the lender you borrow from, different restrictions will apply. It’s best to ask your lender at the start of the process what potential roadblocks you may face.

Possible Benefits 

There are plenty of benefits to buying from family that may make all your troubles worthwhile.

Low or No Down Payment 

In addition to buying a home from a family member, did you know that relatives are allowed to gift equity as a down payment? Suppose you’re buying a house from your now empty-nester parents but want to put down more than you can afford. That’s where gift funds come in! Eliminating the traditional 15 to 20 percent down payment cost could save you thousands of dollars in the end. Here are a few rules you should be aware of for gifts of equity.

FHA Loans

FHA loans are often a popular choice for homebuyers because of the flexibility they provide for lower credit scores, gifted down payments, and the ability to get approval with more debt (DTI) compared to your income than conventional loan programs. FHA loans also allow your entire down payment to come from gift funds. However, one thing to keep in mind is that gift funds can only be used on primary residences.

Homes sold between family members can have a down payment as low as 3.5% as long as one of the following conditions are met:

  • The home was owned by the family member as a principal residence
  • The family member purchasing the home occupied the property as a primary residence as a tenant and can prove they paid rent for six months, as well as provide a copy of a lease

If these conditions can’t be met, then the minimum down payment will need to be 15%. This can be covered by the gift of equity or a combination of equity and your own funds. Regardless of how the down payment is split, a gift letter will need to be provided.

Conventional Loans

Conventional loans have more stringent credit score and DTI requirements but still provide the opportunity to utilize gift funds. Fannie Mae has slightly different requirements than Freddie Mac when it comes to family-to-family purchases.

Fannie Mae gift of equity requirements: Fannie Mae allows gifts of equity to cover the full down payment on a home, provided the borrower meets the other requirements. You aren’t required to contribute your own money, but you will need a gift letter from the family member confirming no repayment is expected.

Freddie Mac gift of equity requirements: Freddie Mac allows for a gift of equity from a family member to cover the full down payment without any cash from you as the buyer.

Lower Closing Costs & Flexible Closings

Because there’s no need for a real estate agent to be involved in the closing, this could save you and your family member around 5% of the sales price in an average transaction. Keep in mind that you’ll need to know if you’re inheriting any title issues. And as we mentioned before, you lose the expertise of a professional.

A family-to-family transaction can also be much more flexible when it comes to the closing and moving dates. You can buy and move with ease because you know (and can coordinate) with your family.

Ready to talk to your home loan experts? Click on www.thepoldergroup.com to get started.

DIY Real Estate Agent, Yes or No.

You can DIY a new bookshelf, a shed for your backyard, or even your kids’ Halloween costumes. But should you try to DIY your home buying experience? According to the National Association of Realtors (NAR), only 11 percent of homebuyers chose to purchase a home without a real estate agent in 2019. The benefits you get when you work with a real estate agent far outweigh the time and money it takes to list and buy on your own. Let’s break it down.

Market Knowledge

When you work with a real estate agent, you’re getting more than just an agent; you get a marketer, advisor, and expert on local neighborhoods. You can read all the online resources in the world and become an expert on your purchase, but an agent will come with the right knowledge to avoid potential roadblocks and get you the best deal possible. Not to mention, your agent will have an in-depth understanding of current market trends and have access to resources that the average home buyer doesn’t.

Another upside to working with an agent is that you’re still in the driver’s seat! As the buyer (and sometimes seller), you have the power to choose the right real estate agent for you. Ask questions, talk to references, and take the time to find someone who can communicate well and knows your long-term goals. Keep in mind that there is a difference between a real estate agent and a Realtor.

A real estate agent is a professional who has obtained a real estate license to assist in the buying and selling of properties. In some cases, agents will have a specific focus, either listing or buying. On the other hand, a Realtor is a real estate agent who is also an active member of the National Association of Realtors (NAR).  Agents within this organization are required to adhere to an extensive Code of Ethics, which can be an attractive quality to buyers who want to know the agent they’re working with has their best interest in mind.

Time Saved

As a homebuyer, there’s more to the process than shopping for homes. You’ll need to meet with a licensed lender to obtain financing, coordinate times to see multiple homes within your budget, make an offer, schedule appraisals, negotiate repairs after the home inspection, and so much more.

Thankfully, a real estate agent acts as your command central when it comes to checking off all the boxes needed to go from thinking about buying to moving day. Homeowners who find an agent that can act as both the listing and the selling agent can also eliminate the additional stress of communicating between two parties.

Money Spent, Money Earned

Speaking of sellers, a 2019 NAR study revealed that of all the “For Sale by Owners,” or FSBO sellers, 63 percent of sellers who didn’t know their buyers only chose to go without a real estate agent to avoid paying a commission.

In theory, skipping out on the average 6 percent commission costs of using an agent appears to be a savvy financial move. However, NAR also found that FSBO sellers sold for a national average of $200,000 in 2019. Agent-assisted buyers, on the other hand, sold for an average of $280,000. A 6 percent commission on a home sold for $280,000 home is only $16,800. When you do the math, FSBO sellers may be leaving more money on the table than those who choose to use a listing agent.

Avoiding Legal Issues

When you choose not to work with an agent, you also lose the advice and representation of a seasoned professional. Using incorrect paperwork can lead to lead to legal issues and misrepresentation later on down the road. One alternative to using an agent is to hire a Real Estate Attorney to draft the legally binding paperwork. This option, however, still leaves the buyer and seller to handle the title and escrow process on their own.

The Bottom Line

When it comes time for you to buy, sell, or do both, we recommend working with an experienced and knowledgeable real estate agent. It’s essential to do your research and find the best agent for your needs.

Are you thinking about purchasing a home? Contact us today for more information about financing and local recommendations for agents we trust!

Pathway To Purchase 2021

Announce Pathway To Purchase

The Arizona Department of Housing (ADOH), in partnership with the Arizona Home Foreclosure Prevention Funding Corporation (AHFPFC), provides down payment assistance to qualified homebuyers purchasing a primary residence in 26 targeted zip codes in 12 Arizona Cities. Pathway assistance is an incentive to purchase in targeted housing markets that have been hardest-hit by foreclosures.

The Pathway to Purchase (P2P) Down Payment Assistance Program provides an attractive 30-year fixed-rate mortgage with a Down Payment Assistance (DPA) second mortgage equal to * 10% of the purchase price. The DPA second mortgage is a five–year forgivable lien against the subject property at a 0% interest rate and no required monthly payments.  The down payment assistance (DPA) can be used toward the down payment and/or closing costs. DPA is only available in conjunction with a P2P first mortgage and is funded by the AHFPFC at the mortgage loan closing.

Program Highlights:

  • Mortgage for the purchase of an Owner occupied, Primary Residences in targeted areas.
  • Borrower(s) Income not to exceed Freddie Mac FHA Advantage ≤ 80% AMI.
  • Purchase Price limit not to exceed $439,860.00.
  • Existing, previously occupied properties only, new construction, including spec homes are not allowed.
  • The DPA provided is 10% of the purchase price * up to a maximum of $20,000.
  • Freddie Mac HFA Advantage mortgage only.
  • The P2P Program is strictly limited to the targeted zip codes in the following cities: (see target area table for specific zip codes).
    • Bull Head City, Casa Grande, Glendale, Green Valley, Kingman, Phoenix, Rio Rico, Sahuarita, Sierra Vista, Tucson, Vail, Yuma.
  • Each borrower must complete a homebuyer education course before closing.

LENDER OR A BANK FOR MY HOME LOAN?

Buying a home is one of the most important purchases you’ll ever make, so it’s best to stay informed of all the options available to you. Although both mortgage lenders and banks can help you get the funds you need to buy, there are pros and cons to each choice.

Traditionally, mortgage lenders have more options for homebuyers than banks.

Depending on your current financial profile, you may qualify for more than one type of loan. However, you’ll find a good fit for you based on your long-term goals, housing needs, current standings.

Mortgage Lenders

A mortgage lender is a bank or financial company that lends money to borrowers to purchase a home. A mortgage lender or bank can be both the loan provider and the servicer of the mortgage. Despite funding the loan initially, the lender will often sell your loan to a larger financial institution, which is typically why lenders can offer lower interest rates than banks.

The good news is consumers have government-mandated protections relating to the servicing of home loans. These protections also cover loan transfers from one servicer to another, so this shouldn’t be a concerning factor when deciding between a bank or a mortgage lender.

In some cases, borrowers may also find that a mortgage lender will be less strictly regulated than a bank and more forgiving of less than perfect credit. This is not always the case, so it’s best to speak with a financial advisor and weigh all options carefully.

Borrowers also could choose a local mortgage company that can help guide them through the home loan process from start to finish. Mortgage lenders must pass several mortgage-related courses and exams, which helps them develop a deep level of knowledge in the industry.

Mortgage Lender Pros

  • Possibility for lower interest rates
  • Diverse loan options
  • Potentially faster closing time
  • In-depth knowledge about the process
  • Can meet with local advisors

Mortgage Lender Cons

  • The lender may only provide online services if there is no physical location near you
  • Your servicer may change after closing

Banks

If you have an existing relationship with your current bank, this may be the more “comfortable” choice. On the other hand, the most comfortable choice may not be the best choice for your long-term goals. The difference in loan type and length could end up saving you thousands of dollars over the life of your loan.

However, some banks offer special benefits or discounts for existing banking customers that choose to apply for a home loan with them. The offers often include special savings or checking accounts, credit cards, and other products. The best way to learn more about this is to reach out to a representative at your bank. (They may also have insight on upcoming promotions to take advantage of.)

One major downside of a bank loan is that they often come with stricter lending guidelines. Not to say that a mortgage lender would have lower standards, but your loan may take longer to close if you’ve had a major financial event, such as a foreclosure or bankruptcy.

Bank Pros

  • Existing relationship
  • May offer special rates

Bank Cons

  • Less mortgage lending experience
  • Possibly longer closing time
  • Stricter lending standards

Interested in learning more? Contact a Mortgage Advisor for a complimentary consultation!

QUESTIONS YOU SHOULD ASK YOUR MORTGAGE ADVISOR

When it comes time to apply for a home loan, your Mortgage Advisor will cover the basics with you. This will typically include your interest rate, which loan solutions you qualify for, etc. However, there are a few important questions you can ask your lender to let them know what you need further clarification on.

What is my interest rate?

Rates are currently lower today than they’ve been in over 50 years, which is great news for homebuyers and those looking to refinance to a lower rate. However, there is no guarantee what your rate will be until your financial situation has been thoroughly evaluated. Multiple factors affect your rate, including:

  • Credit score
  • Property type and location of the home
  • Loan term
  • Interest rate type (fixed or adjustable)
  • Home price and loan amount

What are my loan options?

Depending on where you stand financially, you may qualify for multiple loans. Each loan will have different minimum down payment and credit score requirements. Your mortgage will also differ by the type of rate (fixed or adjustable.) Ask your advisor to walk you through all of your options and explain what the long-term of each loan will look like.

If you have circumstances that prevent you from falling within the traditional mortgage parameters, your loan options might change. For example, if you’re self-employed, your bank statements would be evaluated, rather than your tax returns.

Will I have to pay Mortgage Insurance (MI)?

If you put down less than 20% of the purchase price of the home, you will most likely have to pay Mortgage Insurance. MI is also typically required on FHA and USDA* loans. This helps offset the risk the lender would normally assume on a low down payment transaction.

What additional costs will I pay at closing?

Closing costs vary from loan-to-loan because many fees are based on the exact amount of money borrowed. The more you borrow, in general, the higher your costs. However, it is a general rule that closing costs run between 2-5% of the sale of the home.

Even though they’re called “closing costs,” you may be asked to pay some fees as the loan process progresses, like home inspections and appraisals. While your estimated closing costs will be included in the loan estimate, many of the fees listed can change along the way.

Does my partner have to be on the mortgage?

The short answer is no. Having a spouse as a co-borrower on a mortgage can often increase your odds for qualification if they have a good credit score, employment history, and income. In some cases, one spouse may have credit issues or complex income, which could work against you when applying for a mortgage. In that case, it may be more beneficial to have only one borrower on the loan.

However, both spouses may have to have their credit checked, so you’ll need to speak with your Mortgage Advisor about this. If you change your mind later on, a non-borrowing spouse can be added to the home’s title, or both spouses could refinance the home, which will allow you to apply again as co-borrowers on the new mortgage.

What Is An Escrow Account?

With an overwhelming amount of new terms and phrases to learn in a short amount of time, it can be hard to keep track of it all. That’s where we come in! Today’s topic: escrow accounts. What are they, and why are they beneficial to homebuyers?

What You Need to Know

An escrow account is typically used for two reasons— to protect a homebuyer’s “good faith” deposit before the transaction closes and afterward, to hold the homeowner’s funds for taxes and insurance. The homebuyer can create an escrow account, but the buyer’s real estate agent will typically be the one to open this account.

HELPFUL INFO: During the homebuying transaction, the account may be managed by a specialized company or agent; your escrow company and title company may be the same.

How it Works

Let’s say you find your dream house and put down an earnest money deposit to let the seller know you’re interested. This deposit doesn’t go straight to the seller’s pockets. Instead, these funds are deposited into an escrow account. When your housing transaction closes, the money is then put toward your down payment and closing costs.

Once you become a homeowner, you will fund the escrow each month as part of your total monthly mortgage payment. When you make a mortgage payment through your loan servicer, the money will be distributed among multiple categories, such as:

  • Principal and interest on your mortgage
  • Property taxes
  • Homeowners insurance
  • Mortgage insurance

Items not covered through your escrow account:

  • Utilities and other bills
  • Necessary home repairs
  • HOA fees

Is an Escrow Account Required?

The short answer is, it depends. Some loans will require an escrow account to be set up as an additional safety net for the lender, such as an FHA loan. Regardless of whether your state, lender, or loan requires an escrow account, it’s beneficial to have one in place.

Making Payments from Year-to-Year

Each year, your bank receives updated information on your property taxes and insurance payments. They will then perform what’s often referred to as an escrow analysis.

Because escrow is collected in advance, your lender might not have enough funds in your account to cover any increase in taxes or insurance, otherwise known as a “shortage.” In this case, you will owe the difference. However, you won’t be held responsible for this payment until the bank sends you a notice stating the amount outstanding.

Once you receive the notice, you can choose to pay the entire shortage as one lump sum, or you can choose to pay the amount over the next year. For example, if the shortage is $500, you will pay 1/12 of this amount each month.

In the Event of a Surplus

If taxes in your area happen to go down or your payments are overestimated, you will have too much money in your escrow account at the end of the year. Your lender will then pay the appropriate amount to the municipality, and the remaining amount goes to you.

Your lender will either send you a check for the surplus amount or give you the option to leave the money in your escrow account in case of a shortage in the upcoming year.

 Budgeting for the Future

Anticipating whether or not you’ll be required to pay more on your escrow account can be hard to keep track of. If you prefer to plan ahead, pay attention to any correspondence from your insurance company or taxing authority throughout the year, and budget accordingly.

 Questions? We can help! Talk to a Mortgage Advisor today for a no-commitment consolation.

Purchasing a House as an Unmarried Couple

Let’s face it. The idea of splitting the bills, chores, and other various expenses that come with owning a house can sound super appealing. If you’re already in a relationship, owning a home with your significant other seems like a no brainer.

A 2013 study found that one in four couples between the ages of 18 and 34 bought a house together before they were married. With all the signs pointing to “BUY IT!”, we still recommend that you consider the following factors before leaping into unmarried homeownership.

Who Will Apply for the Mortgage?

As you may know, a good credit score can go a long way when getting approved for a home loan. If you or your partner have credit that’s in bad standing, this could affect your chances of approval. Lenders will look at your individual scores from each reporting agency first, then take the middle score. The lowest score between the two applicants will be the score used to determine approval and mortgage interest rate.

So, let’s say you have excellent credit, but your partner is working toward a higher score. Your partner could be on just the title, not the loan. This will, of course, come with additional risk as to the debt of the home financially falls on only one person.

How is the Property Titled?

There are three general title options homebuyers should be aware of, especially if they are buying a home unmarried.

Sole Ownership: Only one name is listed on the deed, and as we mentioned above, this persona has all the rights and responsibilities of homeownership.

Joint Tenancy: Each person will own 50% of the property. If one tenant were to die, their share of the home would automatically transfer to the other tenant. The right of survivorship also prevents estates or relatives from taking the house in the event of your partners’ passing.

Tenants in Common: This allows for unequal ownership. For example, you could own 75% of the property, and your partner owns the remaining 25%.

Do You Have a Backup Plan?

As uncomfortable as it may be, it’s crucial to discuss what will happen to the property if you and your partner were to split up or if one of you were to die.

In the case of death, choosing the right title for you and your partner could make all the difference. However, ending the relationship brings on more uncertainty for ownership. Forbes recommends unmarried couples agree to a partnership agreement or a homebuying prenuptial. This will help address issues such as:

  • Who is contributing financially?
  • How will the mortgage be paid?
  • What happens if you sell the home?
  • What if the relationship dissolves?

By agreeing beforehand, any conflict during a potential breakup could be settled without litigation or mediation.

No matter what your plans may be, we’re here to help! Contact a Mortgage Advisor today for more information.

Buying a home with a poor credit history

Having a great credit score and a super clean payment history are obviously preferred by most lenders. 

If you’re a homebuyer that is financially ready to purchase a home, but lack a robust credit history then check out these helpful tips.

Tip 1 – Don’t assume you can’t qualify for a mortgage if you have a low credit score because of a limited credit profile — or even no credit score at all. Some lenders are willing to work with borrowers to establish a nontraditional credit profile or to find ways to improve a low credit score.

Tip 2 – A larger down payment, higher levels of cash reserves, and a verifiable income that can easily cover your mortgage payment can help compensate for credit issues.

Tip 3 – Applying for a credit card and using it responsibly can boost your credit score, but you can also rely on other sources to establish your financial history, such as your rent payment and other bills.

Tip 4 – It’s a good idea to talk to your lender about their programs and know your options BEFORE you look at homes. You don’t want to get your hopes set on a home, and then not be able to afford it. 

Are you ready for a no obligation home consultation? Contact your home loan experts today!

Ways To Save For A Down Payment

Saving Money

Saving for a down payment can seem like a daunting, impossible task. This is especially true if you’re already tackling debt and a mountain of bills. However, there are ways to save up for your dream home and still make ends meet. Let’s break it down.

Where should you begin?

Calculate How Much to Save

It’s impossible to save toward a goal that you’re unsure of. Before you plan out a budget, you have to decide how large of a down payment you want to make. This can, of course, be an estimated amount, but you want to make sure the number in your head and the number your finances reflect are similar.

A 20% down payment may be the best option for some homebuyers. However, for other buyers looking to purchase their first home or who need more financial flexibility, a smaller percentage might be more attainable. There are a variety of loan options that require little-to-no down payment at all.

DON’T FORGET: A down payment smaller than 20% will require Mortgage Insurance. MI allows more homebuyers the opportunity to purchase a home sooner than anticipated because it offsets the risk the lender would typically assume on a low down payment transaction. If you’re planning on putting down less than 20%, you will need to factor MI into your monthly payments.

When you have a price range for your dream home and a (realistic) goal for your down payment, use a Mortgage Calculator to estimate what your monthly mortgage payment will be. If the number looks a little higher than you’re hoping for, it may be in your best interest to save toward a more significant down payment.

Determine Your Timeframe 

Depending on the size of your down payment, your annual savings goal will change. It’s also essential to plan for any situations that could cause you to be unable to save toward your down payment goal. Have you considered renovations to your current home? Are you planning on getting married or having kids within this timeframe? What about potential medical costs?

Planning for obstacles will help you determine a realistic amount to save each paycheck and give you peace of mind, as well.

IMPORTANT TIP: Pay attention to interest rates within your savings timeframe as well. Study market trends. If interest rates are traditionally lower in the spring, you might want to push your savings timeline up to get the best rate.

Budget, Budget, Budget

Now that you’ve determined a timeline and savings goal, it’s time to look at where this money will come from. If your savings goal is more ambitious than your current savings habits, changes will have to be made. Whether it’s picking up a side hustle or cutting back on your weekend spending, make clear financial goals for each paycheck.

Get creative when trimming your budget! It’s often the little costs that add up in the end, not the big purchases you planned on. Consider:

  • Skipping the drive-thru and pack your lunch
  • Making coffee at home
  • Using a public park or space to work out (not a gym)
  • Renting a movie instead of going to the theater
  • Working a few extra hours instead of going home early

It may also be necessary to pull your money out of riskier investment vehicles such as stocks or investment trusts. For the time being, you may need to move your money to a traditional savings account separate from your regular accounts.

Don’t Forget About Additional Costs

Don’t let the price tag of a down payment cause you to overlook the smaller, but still costly fees of purchasing a home. You may need to factor in:

  • Mortgage Insurance
  • Appraisal and Inspection Fees
  • Closing Costs

The most important thing to remember when saving is to stick to your goal no matter what. It will pay off in the end!

Whether you’re saving plan starts today, or you’re ready to find your dream home, our Mortgage Advisors are here to help.