What is your Debt to Income Ratio?

Debt-to-Income Ratio Affects Approval & the Interest Rate

Debt-to-Income ratio is a tool that lenders use to qualify buyers for a mortgage and is an important factor in determining loan approval.  It provides an indication of the amount of debt that a potential borrower is obligated to in relation to how much income they have.

Total monthly debts are determined by adding the normal and recurring monthly debt payments such as monthly housing costs, car payments, minimum credit card payments, personal loan payments, student loans, child support, alimony, and other things.

By dividing the monthly income into the monthly debt, you arrive at a percentage of the monthly income.  Lenders actually look at two different ratios commonly called the front-end and the back-end.

The front-end ratio is the proposed total house payment including principal, interest, taxes, insurance, mortgage insurance if required, and homeowner association fees.  Lenders generally don’t want these expenses to be more than 28% of the monthly gross income.

The back-end ratio includes the same items that are in the front-end ratio plus any other monthly obligations like the ones mentioned earlier.  Lenders prefer to see this ratio not to exceed 36% of monthly gross income but some lenders may extend that to 43%.  Borrowers obtaining an FHA mortgage might also be allowed an even higher back-end ratio.

If a borrower had $8,000 monthly gross income, their proposed house payment should not exceed $2,240 or 28% of their monthly gross income.  Then, their house payment and monthly debt should ideally not exceed $2,880 or 36% of their monthly gross income.

For the sake of an example, let’s say that their monthly debt was $900.  That would only leave $1,980 for the maximum house payment.  The monthly debt became a limiting factor affecting the house payment.

In addition to determining whether the buyer qualifies for the mortgage, it could affect the interest rate.  Having good credit and having the proper ratios can result in being approved for a mortgage.  On the other hand, if the debt is on the upper side of an acceptable range, the lender may charge a higher interest rate for the addition risk of a marginal borrower.

While the math is not difficult to come up with your ratios, it is not necessarily a do-it-yourself project.  A trusted lending professional can assess your situation and give you an accurate picture of what price home you can afford and the rate you can expect to pay.

Both things are important to know before you start looking at homes and especially before you contract for one.  All lenders are not the same.  Call me to get a recommendation of a trusted mortgage professional who specializes in the type of mortgage you want. Download this FREE Buyers Guide.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

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How much are Buyer’s Closing Costs?

Buyer’s Closing Costs

Ideally, each party will pay their own closing costs associated with the purchase and the sale of a home, but they can be negotiable based on lender requirements and market conditions.

The fees are usually paid at the settlement and will be itemized on the closing statement.  Buyers should be aware of them before contracting for a home.  If a mortgage is involved, the lender will want to verify that the borrower has ample funds available at closing to pay for them.

Buyer’s closing costs can range between two to five percent of the sales price.  The real estate agents should be able to give you an estimate of what a buyer can expect.  The most accurate estimate will come from the lender at the time the loan application is made. They may or may not include other fees that will be charged to buyers by the title or escrow company.

Buyers are required to be provided a standard Closing Disclosure form at least three business days before the loan closing date.  This document will include the loan terms, estimated monthly payments, loan fees and other charges.  This can be compared to the loan estimate provided by the lender when the application was made.

Fees connected to a mortgage

Loan origination fee … This is the lender’s fee for processing the mortgage application.  It can vary in amount but typically, it can be one percent of the mortgage amount.  It may be possible to negotiate this fee into the rate of the mortgage.

VA funding fee … This is a fee charged to the veteran for closing the loan.  It can be paid in cash or rolled into mortgage.  The amount is based on the status of the veteran, their down payment and whether they have had a VA loan before.

Appraisal … This is a fee paid for a licensed appraiser to determine the value of the property.  It validates that the mortgage will not exceed the purchase price and that the buyer has enough down payment based on the type of mortgage applied for.

Attorney fee … This fee is charged to ensure that the legal documents are drawn properly so the lender will have an enforceable mortgage.  It is not for legal representation of the buyer.

Discount points … A point is one percent of the mortgage.  These fees are considered prepaid interest and can be used to adjust the interest rate on the mortgage.

Lender’s title insurance … This coverage insures that the lender has an enforceable lien from title claims on the property.  This policy is usually issued in connection with an owner’s title policy and is priced separately.

Mortgage insurance … Most loans made in excess of 80% of loan to value require mortgage insurance to protect the lender from loss if the property must be foreclosed on.  There is no mortgage insurance requirement on VA loans. FHA mortgage insurance premium has two parts.  There is an up-front charge of 1.75% of loan amount and then, a monthly amount which is added to the payment.  Conventional loans usually collect the first month’s premium in advance and subsequent amounts are rolled into the mortgage payment.

Recording fees … These are fees that are for filing the legal documents with the municipal or county recorders.  The documents would include the mortgage and the deed.

Survey fees … This fee is necessary, based on requirements of the lender, to verify property lines, shared fences and driveways and to identify any other encumbrances.

Underwriting fee … This is a separate fee that covers the research and determination that the entire loan package meets the lender’s requirements.

Fees required by mortgage for escrow account

Property taxes … Lenders can require two to three months taxes to be held in escrow so that there will be enough to pay them in full 60 to 90 days before they are due.

Property insurance … Insurance is paid in advance and the annual premium will be due at closing.  The lender further requires one additional month’s amount so that one month prior to the anniversary date, the premium can be paid for the renewal.

Flood insurance … The lender may require flood insurance on the property based on their assessment of the location in a flood zone or proximity to a flood zone.

Fees connected to purchase of a home

Settlement fee … This is the buyer’s portion of the fee paid to the title or escrow company, or attorney who handles the closing of the sale.

HOA Fee … Home Owner Association fees are usually paid in advance by the owner.  They are prorated at closing for the amount paid that the seller does not benefit from.

Owner’s Title insurance … This coverage insures that the buyer, the new owner, received clear and marketable title from the seller.  It will protect the new owners’ interests should they be challenged.  Even though it may not be required, it is recommended.

Pest inspection … A pest inspection by a licensed exterminator can be required by a buyer to determine if there are active termites or termite damage, dry rot or another pest infestation.

Property inspection … A home inspection conducted by a professional can be required to determine structural integrity of the property as well as all the systems in the home.  It can include but not be limited to plumbing, electrical, roof, heating and air conditioning, appliances and other things.

Title search … Sometimes, title companies waive this fee when an owner’s title policy is issued.  It can be customary that a separate fee is charged in addition to the premium for the title insurance.

Transfer taxes … When government taxes are required, these fees must be collected.

The Consumer Financial Protection Bureau is a U.S. government agency that makes sure banks, lenders and other financial companies treat the public fairly.  You can download a Closing Disclosure Explainer from their website.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Is your Mortgage Assumable?

Where Did the Assumptions Go?

Mortgage assumptions have not been a practical matter for the last 30 years because mortgage rates have been on a steady decline.  Even if the seller had a rate lower than the current rate, the new purchaser must qualify to assume the loan.

In the case of conventional loans, the lender has the right to increase the rate to the current rate which neutralizes the reason for assuming the loan.  This change took place in the early 1980’s when lenders added due on sale provisions so lower rates could not be assumed.

FHA and VA loans can be assumed at the existing rate with the provision that the purchaser qualifies for the loan.  This could be an advantage if the rate on the loan to be assumed was lower than the current mortgage rate for FHA or VA and the buyer is going to owner-occupy.  Unfortunately, investors are prohibited from assuming FHA and VA loans.

Besides the obvious advantage of a lower rate which would have a lower payment, the closing costs are lower on an assumption than originating a new loan.  Another benefit is that the loan will be further into the amortization schedule than starting a new 30-year loan which means it would be retired sooner while the equity is also growing faster.

The current rates are close to one-percent lower than they were a year ago, so, assumptions are probably not a method of financing a home purchase in the near future.  The Freddie Mac forecast expects rates to remain low, possibly at a yearly average of 3.0% in 2021.

Mortgage rates have remained low since the Great Recession even though experts anticipated they would start trending upward.  If rates increase, especially rapidly, assumptions of FHA and VA loans could easily be a tool that buyers and real estate professional alike will be employing.  For sellers with an assumable loan at a below market rate, it could add to the value of the property as well as the marketability.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Vacation Home Sales Increase

Vacation Home Sales Up 44%

Vacation home sales are up 44% year-over-year according to the National Association of REALTORS® based on sales during the July to September period.  Not only are the number of units up, but they are also selling faster than in previous years.

On a national basis, 72% of existing vacation homes closed in October were on the market for less than one month.

The increased desirability and affordability of vacation homes, according to the National Association of Realtors, seems to be influenced by the pandemic and low mortgage rates.  The ability to work from home seems to be contributing to this increase.

Freddie Mac reports the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 2.83% in October compared to the aver commitment rate for all of 2019 which was 3.94%.

There may also be a safety factor involved with these decisions to purchase vacation or second homes.  Contagious diseases flourish more in highly populated areas like big cities and suburbs. The locations of the vacation or second homes are generally in areas with less residents.

The slower pace from the city may also add to the appeal of considering second homes.  Proximity to the mountains or water, whether it be the ocean, rivers or lakes, have become a lure to people who realize that if where they work doesn’t matter, they can select a place where they want to be.

Historically, Americans on the east coast left the cities during the 1793 yellow fever epidemic.  The same migration took place in the mid-19th century during three waves of Cholera and Scarlet fever.

Trends have yet to determine whether some of these new vacation home buyers may consider moving permanently or may reconsider the decision after the pandemic.  Currently, it does have broad-based appeal and offers a lot of flexibility to owners who can afford it.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Home Inspections

Home Inspections

A home inspector is another key professional involved in a real estate transaction.  Many times, the sales contract will have a provision that allows the purchaser to have inspections made to discover issues that are not readily apparent or have not been disclosed by the seller.

It is important to have a qualified individual perform the inspection.  Regardless of whether a license is required, buyers should ask about the inspector’s experience, training, years in business and if they are familiar with the area and type of property involved.

Membership in professional associations can indicate an inspector’s commitment to education and training.  References from both customers and agents are helpful and may be more meaningful.  You are encouraged to call the references, especially, if you are concerned about any specific areas.

Errors and Omission insurance is intended to cover mistakes made during an inspection.  It would be good to find out if the inspector has this type of insurance and how mistakes are handled or if omissions are made.

Find out exactly what is included in the inspection and what will trigger the inspector to recommend that you get an opinion by a specialist.  They should be able to provide you with a sample report so you can see the detail with which the items will be explained.  Ask if items that need attention will also be documented with pictures.

Some inspectors will allow you to accompany them during the inspection.  They will be able to point out their concerns and answer any questions you may have about different things.  An inspection can take two to three hours depending on the size of the property.

Generally, there is a time allotted in the sales contract for the inspections to be made and not completing them in a timely fashion could waive your right to use the contingency.  Your real estate professional will be able to guide you through this process.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Buying Your First Home

First Things First

If you are making a particular meal for the first time, it is essential to have a recipe so that it turns out the way it should.  Knowing the ingredients and preparation can guide you through the process.

Buying a home is really no different than making a new recipe.  There are certain things that need to be done, many of which should occur in a particular order to save time, money, effort and disappointment.

Your first inclination may be to start searching the Internet for homes and schedule some showings or possibly visit open houses.  Even though this is very gratifying, it shouldn’t be done until you have gone through the preliminaries.

Buying a home for the first-time implies you haven’t been through the process before and even though, you may have a rough idea of what needs to be done, selecting the right agent in the beginning will give you the benefit of years of personal and professional experience that can help you avoid some of the common mistakes made when buying a home.

This agent can direct you to find the other team members that are required like the lender, title company, inspectors and others.  Each member of the team has an important role to play that if not done correctly, could cause delays and possibly, jeopardize the transaction.

An important step is getting pre-approved so that you’ll know exactly what price mortgage and home you’ll qualify for.  This may even allow you to lock-in a mortgage rate before you contract for a home.  The pre-approval could also prove very helpful in negotiating with the seller by removing some of the doubt in their mind regarding an unknown buyer.  Another advantage to pre-approval is that if you are competing with multiple offers, you have the advantage of being more of a known commodity.

You’ll need to assemble some documents for the lender including pay stubs from the past two months, W-2’s from last year, proof of additional income, tax returns for the past two years, bank statements for the last three months, list of all open credit accounts and balances, copy of driver’s license and history of residence for past two years.

Buying a home is one of the most important decisions in your life and it should be done with care and research.  When all the things are done in the right order, finding the “right” home is just like following a recipe.  For more information, download this Buyers Guide that includes great information to help you through the process.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Cut your Housing Costs

Cutting Your Housing Costs in Half

Cutting the price will generally bring buyers of anything out of the woodwork that were not serious before.  Some renters could easily lower their monthly cost of housing by half or more by purchasing a home with all the financial benefits that come with it.

The most obvious thing in today’s market is that the mortgage payment could be less than the rent the tenants are paying.  With mortgage rates hovering around 3%, this is a major factor of the savings.

The two other major contributing factors are appreciation and amortization of the mortgage, neither of which benefit tenants continuing to pay rent.  According to the FHFA House Price Index, home prices rose 5.4% from July 2019 to July 2020.  There were 400,000 less homes on the market during the summer of 2020 than the previous summer which is influencing appreciation.

With each payment a homeowner makes on their mortgage, a portion is used to reduce the principal amount owed.  This is like a savings account for the owner because it lowers their unpaid balance and increases their equity.

The equity becomes an asset that can be accessed by doing a cash-out refinance or a home equity line of credit once the equity has reached 80% loan-to-value.

A $300,000 home purchased with an FHA loan at 3% for 30 years would have a payment of approximately $2,013 including principal and interest, taxes, insurance, and mortgage insurance premium.  If the tenant were paying $2,400 in rent, this would be a savings of almost $400 a month.

The monthly principal reduction would average $500 a month for the first year which would lower the net cost of housing.  The other major item to consider would be the appreciation.  Assuming, in this example, the home was appreciating at 3% annually, the monthly appreciation in the first year would be $750 which would further lower the cost of housing.

Rent

$2,400

Total House Payment

$2,013

Less Monthly Principal Reduction

$513

Less Monthly Appreciation

$750

Plus Estimated Monthly Maintenance

$200

Net Cost of Housing

$950

 

In this example, it would cost over $1,400 per month more to rent than to own.

A different approach to this would be that the equity in this home in seven years would be $121,579 based on appreciation and principal reduction.  If the same person continues to rent, there would be no equity build-up.

If you’re curious as to how much you could cut your housing cost, go to the Rent vs. Own or contact us.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

 

Homes Coming Soon

Four Things Sellers Should Do Before the Sign Goes in the Yard

Just like buyers should be pre-approved before they begin to look at houses, Sellers should have their home pre-approved.  The reasons are similar: appeal to the “right” buyers, discover issues with the home early, improve marketability, increase negotiations position and close quicker.

For the seller, there are few things that need to be done before the sign goes in the yard and definitely before prospective buyers see the home.  The first is to understand that once you decide to sell the home that it needs to appeal to the broadest base of buyers and that means depersonalizing your home.

Once the home is sold, you will need to pack your things for the new home.  Think of this as starting the process early.  Get moving boxes and make decisions on what you intend to give away or discard in each room and closet.  Identify and pack those items before the home goes on the market. This will be the first wave of making your home more marketable.

When your home hits the market, it needs to be a neutral commodity and not “your” home.  A good rule of thumb is to remove items that involve religion, hunting and sports.  That means removing personal items like family photos or collections displayed in the room.

Next, in round two, go through every room to remove the items that make too large of a statement or take up too much room.  Pool tables may be appropriate in a game room, but they are not in a dining room or a living room.

Personal collections may have taken you years to accumulate and you’re proud of them but the people who come to see your home will either not appreciate them or they will become distracted by looking at them instead of the home.  The livability of your home needs to be the focal point.  The buyers need to visualize themselves living in the property that will become “their” home.

The four most important rooms to address are the primary bedroom, kitchen, living room and dining room.  These rooms have a major influence on buyers when determining whether “it is the right home.”   Bright colors, possibly used as accent walls, should be neutralized.

After you have depersonalized the home and removed non-essential items that could make the rooms or closets look small, you might want to consider another technique referred to as staging.  Rearranging furniture so the room shows to its best advantage is simple and doesn’t cost a thing.  You might decide that a coffee table or statement piece would be nice and your REALTOR® or stager can suggest a place to rent it rather than buying it.

Once the home is depersonalized and staged, you are ready to have a professional photographer take the pictures that visually describe your home to potential buyers long before they ever look at the home physically.  These will be used on websites, portal sites, MLS, and social media.  Anyone with a point and shoot camera thinks they are a photographer but a pro with the correct wide angle lens, who understands lighting and has an “eye” for what makes a great picture is worth every dime you’ll spend.

One more consideration should be to have the home inspected before it goes on the market.  It won’t replace the buyer’s inspections but it will discover any items that need repair and they should be done before the home goes on the market.  This will probably save you money because it might cost less to repair them than they’ll want in second round of negotiations when their inspector finds it.

Another benefit is that if their inspector identifies a problem area that your inspector did not, you have a basis for legitimate disagreement that could just be personal opinion instead of a “fact.”

While the process of depersonalizing should take part before you put the home on the market, you’ll want you have the benefit of your real estate agent’s experience to help you with the process.  At age 18, a person can expect to move nine more times but by age 45, they may only expect to move another 2.7 times.  Your REALTOR®’s experience can be valuable not only in saving your time and money but actually, make the difference in a successful sale.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

Real Estate Investing 101

Alternative Investments

In a recent article, The Wall Street Journal reported that investors have rarely been this flush with cash.  The economic uncertainty due to the pandemic and the volatility of the stock market has caused assets in money-market funds to increase to approximately $4.6 trillion, the highest level on record according to Refinitv Lipper.

The question becomes should an investor be “out of the market” until things settle down or should they seek to find alternative investments to produce satisfactory results.  Even in the middle of this uncertainty, residential rental property has been a stable performer.

Rents are continuing to increase along with values.  Investor mortgages are available at 80% loan-to-value at fixed interest rates for 30-year terms.  Most other investments must be purchased for cash or at best, are limited to low loan-to-value loans, at floating interest rates for relatively short time frames.

The use of borrowed funds, especially at today’s low interest rates, contribute to the rate of return and in some cases, increase it.  This characteristic is known as leverage.

Income properties enjoy specific tax advantages like long-term capital gains rates lower than ordinary income rates, standard depreciation, which is a non-cash deduction, as well as expensing many big-ticket items in the year purchased.

Tax deferred exchanges are available for investors wanting to avoid the tax due on sale and defer the profit into the replacement property.

One of the most cited reasons people invest in rental homes is that they feel they are more in control.  They understand a rental home because it is the same type of property and requires the same maintenance as the home they live in.  They can make the decisions to improve it, repair it, what rent to charge and when to sell it.  For most owners, a home represents their largest financial asset.  That familiarity becomes a natural bridge to decide to invest in rental property rather than something they are less familiar.

If you’d like to know more about the benefits, download the Rental Income Properties guide and call us at (503) 851-1645 to discuss what kind of opportunities are available.

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

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Home Appraisers Size Adjustments & Valuations

How Does It Measure Up?

People are always looking for a “down and dirty” way to determine the value of a home and square footage seems to be one of the most common things used by people whether they are buyers, sellers or real estate agents.  While it seems straight forward, there are several variances that can lead to inaccurate determinations.

The market data approach to value uses similar properties in size, location, condition and amenities to compare with the subject to arrive at a price.  Differences in any of these things can affect the price per square foot.  Appraisers are trained and licensed to make these adjustments but the differences are not necessarily objective and that is where opinions start to influence the value.

Even if a person were to make accurate adjustments, they would be based on the assumption that the square footage of the comparable properties is correct.  That leads to the next area of concern: how was the subject property measured.

It is commonly accepted to the measure the outside of the dwelling on detached housing.  Is it customary in this area to include porches and patios under roof and if so, do they get full value or only partial value?  Is there any value given to the garage since it isn’t living area?  What about other areas that do not have HVAC coverage?

Some areas don’t give consideration to basement square footage at all.  Others might give some value if it is finished or has access directly to the outside like a walk-out basement.  Similarly, attic space could be finished and under HVAC but if the ceiling height is not standard for the home, it may not receive value.

The problems become exacerbated when different comparables are not treated consistently and yet the common denominator ends up being an average of the square foot price of each.   This is calculated by taking the sales price and dividing it by the number of square feet being quoted.

The source of the square footage should be listed to help determine the accuracy.  It could be what the builder said it was to the original purchaser.  If there is a set a plans available, that might seem credible but it is not uncommon for the builder to make changes while the home is being built which could increase or decrease the square footage.

Another source is the tax assessor.  In many cases, they don’t actually measure the home but take the word of the builders or appraisers for it.  If permits were obtained to add on to the home since it was built, it should be reflected in the square footage.  However, sometimes permits are not secured properly.

After reading this, you may think that more doubts have been introduced than solutions and you are correct.  It takes diligence on the part of all parties to determine the correct amount.  The most highly trained person will be the appraiser and they should be measuring the home in its “as is” condition but understand that even a competent person can inadvertently make a mistake.

If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services.  1008 12th St. SE Salem, OR 97302  503-851-1645

Also, to mobilize us right away to help you move, visit us here:

brianandnina.com/buyers

brianandnina.com/sellers

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