Real Estate Finance 101

Hi Folks,

   Hope you've been well, and I'm glad to be back here with you !

   For some of you reading this, you are Real Estate Gurus, and you can finance a home in your deepest sleep. For the others, you are obviously familiar with Real Estate on some level, so with today's post, I'm trying to hit on all levels of Real Estate Skills.

   Financing. Without it (in one form or another), Real Estate would not change hands. Financing is a very broad term, and when discussing Real Estate, it helps to break the topic into “Traditional” and “Non-Traditional“.

   In an article on the RealtyBizNews.com website, titled, "Real Estate Money Basics – 10 Ideas For Financing a Home", the author describes the traditional category as inclusive of "government insured loans like FHA, VA" and others. They mention the fact that since these loans are “insured”, that "they generally require the borrower to jump through a number of “hoops” in order to qualify.", and that they require, "better credit scores, documented income, a careful review of your bank statements and any other information the lender may happen to require", and in addition, they "generally offer the lowest down payment options".

   FHA, the best known, can be "applied to almost any home, in any location, as long as the home meets certain condition requirements and the buyer can meet the credit and income requirements", says the article. If you are a Veteran, you may be eligible for a Zero down payment VA loan.

   Since these loans are “government insured” to "protect lenders from a borrower default", they still will "allow" borrowers to "buy with a low down payment, and still avoid a higher interest rate", and in return, the lender can "make a “claim” for insurance if the property goes into foreclosure". RealtyBizNews.com says that these loans are "very expensive", and include funding fees” and other costs that are "rolled into the loan".

   Now, onto the “non-traditional” financing sector, which deals with the purchase of a home "without the hassles of qualifying for a traditional loan".

   Even though these options are "open to all buyers, they are not very well known to the general public", say the article on RealtyBizNews.com, and calls this "creative real estate finance” a group of strategies in which "real estate investors spend a great deal of time studying and practicing", and that most of these strategies "will not require good credit, and a few don’t even require the buyer to have any money of their own."

   Some examples, but we'll lead off with our personal favorite: "Lease with an Option to Buy" (or "Rent to Own")

   “Lease with an Option To Buy”, as described on RealtyBizNews.com, is a "popular strategy for buyers who don’t have good credit and don’t have money for a down payment", where the "tenant/buyer finds a property to rent, with a landlord who is willing to credit them with a portion of the rent towards a down payment". Over the course of the contract, "If the buyer pays their rent on time, and accumulates credit towards a down payment, they can then “exercise their option” and purchase the property at a price that was agreed upon when they rented the property.". This strategy is immensely popular with investors to sell their properties, and is a very good way to sell in a tough market, and a great way for a "tenant/buyer to accumulate credit towards a down payment." The caveat here, as always: "Buyers should have their lease and option agreement reviewed by a competent attorney to insure that the deal is structured properly.

   Some other ways include: “Subject-to the existing mortgage”, where the buyer takes over the payments on the sellers existing mortgage “Hard Money” loans, which are short-term (and expensive) loans made on a property in need of repairs. “Seller Financing”, which is preferable to a seller vs. renting, and works great when the seller has a lot of equity and is perhaps unable to sell.

   Some great financing ideas have been raised here for you. Perhaps you already know about them, but if they are new concepts for you, I hope that you can use them in your Real Estate Investing endeavors (of course, after you do your homework and have your attorney review your plans and contracts). Do you have any to add to this list?

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Have a Great Week, and Happy Rent-to-Owning !
Regards,
Rob Eisenstein
HomeRun Homes Blog: http://blogging.lease2buy.com
HomeRun Homes Websites: http://www.lease2buy.com and http://www.homerunhomes.com

TAGS: #RealEstateGuru #RealEstateInvesting #creativerealestate #financingahome #traditionalloan #FHA #VA #leaseoption #renttoown #subjectto #hardmoney #sellerfinance

Does Subprime Still Exist ?

Hi Folks,

   Hope you've had a great week, and that you've been able to keep warm !

   A few days ago, a colleague of mine asked me if subprime loans still exist, and I realized that I have not heard the term, "subprime", for quite a while, and I also realized that before responding to him, I had better gather a consensus from some mortgage professionals with knowledge on this topic. At the same time, I figured that this might be something to share with all of you good folks out there, as well.

   We spoke with a few sources, one of which is Fred Glick, a mortgage broker and banker, who says that, "Fannie Mae and Freddie Mac now have minimum credit score standards based on loan to value.", and that the, "new subprime lenders are private ones that charge a lot in rates because they are limited to what they charge in points by many different state and federal laws, including but not limited to what is coming out under the Merkely Amendment of Dodd-Frank", that, "limits compensation to a maximum of 3% of the loan amount and does not allow for both front end points and back end compensation from lender to broker in the same transaction."

   Steven Bote, Mortgage Planner, says that the "very short answer" is, "no, subprime lending does not exist.", and he continues to say that, "for me, the defining characteristic of all subprime loans is the absence of "documented income necessary to support the ability to reasonably repay.". Bote says that today, residential financing is on the "complete opposite extreme of the lending spectrum from where it was three years ago during the height of the subprime era, and as such, everything is fully documented (pay stubs, W2s, tax returns, schedules, etcetera)."

   Any discussion on lending would not be complete without looking at the impact of FHA and VA loans, of which Bote calls, "Government-based loans that allow for higher LTV-based financing, such as FHA and VA". Bote says, that for example, "FHA allows a person to buy an owner-occupied 4-unit property with as little 3.5% down of the purchase price, and VA financing of the same property type allows for 0% down payment (and with as low as a 620 middle FICO)", and says, "To put things into perspective, conventional financing requires all buyers to put down a minimum of 20% of the purchase price." Glick says on a similar note that the, "VA has gotten tougher and FHA claims not to have a minimum, but the GNMA market is moving up to 620 to 640 as a minimum. So, for the people with the scores in the 5's, it's a problem unless you have lots and lots of equity."

   Greg Cook, a Mortgage Professional, agrees that a, "certain segment of the subprime market is being served by FHA financing", and also says that, "Most subprime (hard money) lenders have gotten out of owner occupied loans because federal and state legislation limit the total fees that can be charged. These limitations do not apply to commercial, business or investor loans, so hard money lenders have evolved back to these types, which were their staples before the rise of subprime."

   So, with all of this information in hand, I have duly advised my colleague that the subprime market does still exist (well, kind of), and as Cook said, he has seen, "subprime mortgages start out as hard money, morph into subprime for homeowners, and back to hard money.".

   Do you have anything to add to this discussion? We welcome your comments and insights.

Have a Great Weekend, and Happy Rent-to-Owning !
HomeRun Homes Blog http://blogging.lease2buy.com
HomeRun Homes Website http://www.lease2buy.com

TAGS: #mortgage #loans #hardmoney