It is common for home purchase contracts to include contingencies of different types – mortgage contingencies included. These basically refer to clauses that safeguard the interests of buyers and sellers under different scenarios. Simply put, a contingency clause gives a purchaser the ability to back out of a deal without losing your earnest money based on whether you meet certain predetermined conditions. 

 

As a homebuyer, it’s important that you learn which contingencies you need to include in your purchase contract. However, adding too many might work as a deterrent in the eyes of sellers, all the more so in competitive markets. If in doubt, it might in your best interest to consult with your real estate agent or attorney.

What is Mortgage Contingency?

A mortgage contingency, a loan contingency, and a financing contingency refer to the same type of contingency. It is a clause that essentially gives buyers some time to get the required financing they need to move forward with their purchases. If a buyer is unable to get the funds needed to close, he/she has the ability to back out of the purchase contract without losing your earnest money.

 

A mortgage contingency clause includes a predetermined time period during which you need to get financing. It also specifies a date until which you may terminate the contract or seek as extension. Once this period is over, you become legally obligated to purchase the property. If you cannot, you stand to lose your earnest money. The time period mentioned in financing contingency clauses typically ranges from 30 to 90 days.

 

How the Process Works

Once you narrow down on a house you wish to purchase, you need to submit a purchase offer. If you’ve not received a preapproval for a mortgage, or if you‘re unsure about qualifying for a mortgage that would cover your purchase, adding a mortgage contingency clause might be in your best interest. 

 

Upon signing of the purchase agreement by the buyer and the seller, and after the buyer provides the earnest money, the seller takes the property off the market. The buyer then has until the mortgage contingency date mentioned in the contract to get the required financing, either through a traditional mortgage or in any other way.

 

Once a mortgage provider approves your application, you’ll receive a mortgage commitment letter. This sets the wheel of closing the deal into motion.

 

If you’re unable to get a mortgage and fail to get financing in any other way, you may terminate the contract before the mortgage contingency date. You then get your earnest money back and the seller is free to seek offers from other buyers.

 

Details Found in a Mortgage Contingency Clause

Both parties need to agree to all the conditions mentioned in a mortgage contingency clause for it to come into effect. Typical details that it includes are:

• Mortgage type. The type of mortgage that you plan to obtain to go through with the purchase – be it a conventional loan, a USDA loan, or a VA loan – typically finds a mention in a mortgage contingency clause.  This way, you’re not burdened with seeking alternate sources of funding at a later stage.
• Funds required. Just how much money you need to move forward with the purchase plays an important role in mortgage contingency. For instance, if you need a mortgage of $80,000 but get approved only for $60,000, you may back out of the deal without facing any negative consequences.
• Interest rate. This is the highest interest rate you’re willing to pay toward your mortgage. If you get approved for a mortgage and the interest rate is higher than what’s mentioned in the contingency clause, you have the ability to back out of the deal.
• Mortgage contingency date. This is the date until which a buyer has the ability to back out of the purchase agreement without losing his/her earnest money. While a buyer may seek an extension before this date, agreeing to it is the seller’s prerogative. 

While a significant number of real estate agreements include mortgage contingency clauses, some buyers do away with it completely. This might be the case if you’ve already been preapproved for a mortgage or if you plan to fund the purchase by using cash. Sellers in competitive markets might ask buyers to waive off this clause to move forward with their sales quickly. However, doing so is not the best idea if you haven’t been approved for the mortgage you seek and the terms you desire, because you then risk accepting a mortgage with less favorable terms or, worse yet, losing your earnest money.

 

The Kick-Out Clause

In the presence of a mortgage contingency clause, a seller might choose to add a kick-out clause. This clause gives sellers the ability to continue marketing their house. In such scenarios, if sellers are able to find other buyers who don’t require mortgage contingency, they may proceed with selling their homes to the new buyers. However, they may do so only after notifying the buyers who originally intended to buy their properties and give them a specific time period to get rid of the mortgage contingency clause from their agreements. This is usually 72 hours or three business days. 

 

What is Appraisal Contingency?

An appraisal contingency clause safeguards buyers’ interests when it comes to the value of the homes they wish to purchase. In this case, the purchase agreement mentions a minimum amount for which the home in question needs to be appraised. If the appraised value of a home is less than this amount, a buyer has the right to withdraw from the deal without losing the earnest money.  

 

Appraisal contingency clauses typically mention terms through which buyers may proceed with their purchases if the appraised value is lesser than that mentioned in their contracts. In some cases, sellers agree to lower their selling prices to the appraised amounts. An appraisal contingency clause includes a date before which a buyer is required to notify a seller of any concerns surrounding the appraisal value.  

 

How Inspection Contingency Works

Inspection contingencies are also referred to as due diligence contingencies. It gives buyers the right to get the homes they wish to purchase inspected within a specified time period – typically five to seven days. A home’s inspection includes its exterior and interior, and addresses the condition of electrical, plumbing, the presence of termites, and ventilation systems. 

 

Depending on the report of a professional home inspector, a buyer may choose to back out of the contract or negotiate for repairs or a lower selling price with the seller. If you feel you need to get an inspector to give the home a second look, you might request for more time. 

 

Cost-of-Repair Contingency

Some purchase agreements include cost-of-repair contingencies along with inspection contingencies. This clause mentions the maximum amount – usually 1% to 2% of the selling price – that you’re okay with when it comes to carrying out the required repair work. If the home inspection report indicates that repair costs will exceed this amount, you may terminate the contract and get back your earnest money.

 

Title Contingency

Upon the sale of a property, the title’s ownership changes to the new owner. Any lien that is not satisfied at closing transfers with the property. When you add a title contingency clause in your purchase agreement, you get adequate time to carry out a title search and check if there are any liens attached to the home you wish to purchase other than the existing owner’s primary mortgage. 

Once you hand over your signed purchase contract to your mortgage provider, it requests for a title search through a title search agency. Since the process may take a week or more, it’s important that you get your lender to initiate it as quickly as possible. Once the title search is complete, you find out if there are any liens attached to the property.  If you find a lien or more through the title search, the seller must settle them at, or prior to, closing. Alternatively, you may back out of the transaction without losing your earnest money. 

 

A title contingency clause also helps safeguard buyers against real estate transactions that include unresolved title disputes, fraud, and forgery. Without a title contingency clause, you might find yourself in a situation where someone else claims ownership of the property or you become liable to repay the previous owner’s debt.

 

Insurance Contingencies

An insurance contingency clause can help if you’re unable to get homeowner’s insurance as required by your lender. For instance, your lender might require that you get homeowner’s insurance before it disburses your loan, and you might have trouble getting the coverage you need because the home you wish to purchase is in a region that has a history of hurricanes, forest fires, or volcanic activity. 

 

The Fine Print

When it comes to contingency clauses, the devil is often in the details. This requires that you pay close attention to all the important terminology and phrases. Since all it takes is one small omission or addition to swing the ball in someone else’s favor, it is ideal that you get an experienced real estate agent or attorney to go through the purchase agreement.  Factors that need your attention when going through the fine print include:

• The earnest money. Your purchase contract should clearly mention what happens to your earnest money should you choose to exercise any contingency. It should explicitly state that you will receive the entire earnest money back if you exercise any contingency within the stipulated time period.
• Deadlines. Depending on the type of contingency, contingency clauses tend to come with deadlines that typically vary from two weeks to two months from the signing of the contract. Make sure you set these deadlines after accounting for how much time it might take to complete the tasks at hand. For example, if you’re not preapproved for a mortgage, two weeks might not be enough to get the financing you need.
• In writing. Irrespective of the contingency clause you want included in your purchase contract, make sure you put it down in writing. Oral communication of contingencies holds no legal ground. The same holds true for correspondence via email, unless the purchase contract states that you may use emails to send notices. For instance, if your contract comes with a requirement of sending contingency notices via certified mail or fax, sending them via email will do you no good. 

Number Speak

It is fairly common for homebuyers to include contingency clauses in their purchase agreements. According to data released in the May 2020 Realtors Confidence Index Survey, 76% of buyer contracts came with contingency clauses. This number hasn’t changed much in recent time. It stood at 75% in April 2020 and at 74% in May 2019. Further, data from May 2020 indicates that:

• 59% buyer contracts included home inspection contingency clauses
• 46% included appraisal contingency clauses
• 47% included financing or mortgage contingency clauses
• 12 % included title contingency clauses
• 6% included contingency clauses surrounding sale of buyers’ existing homes
• 4% buyers waived adding any contingencies

 

Conclusion

Drafting a contingent real estate purchase agreement safeguards your interests should something untoward happen from the time you make your offer and pay your earnest money to the time of closing. While some of the problems that arise during this period might be fixable, others might be big enough to dissuade buyers from moving forward with their deals.

Since sellers might add contingency clauses in purchase agreements, it is important that you go through the paperwork carefully before putting pen to paper. If you’re unsure about any aspect, getting a real estate agent or attorney to go through the agreement might be in your best interest.  It’s also important that you select a mortgage provider based on the type of mortgage you seek.

Until the recent past, your regular payments did not play any role in your ability to qualify for a home mortgage. Fortunately, that has changed owing to a recent announcement by the Federal Housing Finance Agency (FHFA). Now, Fannie Mae will require that lenders consider borrowers’ rent payment histories during the underwriting process.

What Has Changed?

Fannie Mae implemented an update to Desktop Underwriter (DU) – an automated underwriting system that helps mortgage providers make informed lending decisions on government and conventional loans – during the third weekend of September 2021.  All the changes are meant to apply to case files that are submitted or resubmitted after this update.

An important change owing to this update is that positive rent payment history has been added to DU’s risk assessment.

How Will It Work?

If your existing monthly rent is $300 or more, and if a mortgage provider obtains a 12-month Verification of Asset (VOA) report, DU will aim to highlight regular rent payments within the report so they may be used in your risk assessment.  The new risk assessment system will apply to your case file if you meet these criteria:

• You’re a first-time homebuyer
• You have been living on rent for 12 months or more
• You pay at least $300 as rent each month
• You will use proceeds from the home loan toward a purchase transaction
• You will use the property you purchase as your principal residence
• You have a credit score
• Your lender obtains a VOA report that includes bank statement data of 12 months through an authorized DU validation service verification report vendor.

In case DU identifies a rent payment pattern in your bank account data, it will use the information to aid in your credit risk assessment.  To make sure that DU identifies your rent payments, your mortgage provider needs to:

• Mention your monthly rent in the DU loan application
• Get a 12-month VOA report and use the relevant Reference ID in the DU loan application
• Ensure that the bank account from which you pay rent is in your name and that it finds a mention in the VOA report

Why This Change?

According to Fannie Mae, it has implemented this change in credit risk assessment with the aim of improving borrowers’ homeownership odds. Until now, limited credit history has worked as a barrier for many probable homeowners even if they’ve maintained an excellent rent payment history. While rent reporting through different reporting programs can help improve credit scores, not many landlords report rent payments to credit bureaus. Consequently, renters see no positive effect of their regular rent payments on their credit scores. With the new change, this should no longer be a problem as DU will attempt to detect rent payment histories through applicants’ bank accounts.

What You Need to Know About Mortgage Underwriting

As a first-time homebuyer, it is important to understand how the mortgage underwriting process works, as it gives you means to improve your odds for approval. The underwriting process begins only after you’ve narrowed down on a house, a lender, and a mortgage. It requires that you agree to the loan estimate provided by your lender and is indicative of your intent to proceed.

The main aim of mortgage underwriting is to ensure that a borrower and the property in question meet the loan’s requirements. While an underwriter might approve or deny your application, you might also receive a suspended verdict that comes with further requirements for reactivation. 

Even though you might have gone through a preapproval process that entails a preliminary credit check, an underwriter is tasked with carrying out an in-depth credit check and quoting an interest rate. During this stage, you need to provide different types of financial documentation. For instance, while paystubs help confirm your income, bank statements offer insight into your existing financial condition and help determine if you have adequate funds to cover for your loan’s closing costs.

The Underwriter’s Role

Depending on the requirements of your application for credit, an underwriter may follow different measures. These include:

• Investigating credit history. This step involves checking your credit score and taking a close look at your credit reports. Underwriters check for aspects such as credit utilization ratio, late payments, and bankruptcy rulings.
• Verifying employment and income. An underwriter will go through the documents you provide to verify your employment status and income. If required, the underwriter may call your employer to verify the same.
• Checking your DTI ratio. An underwriter compares your existing debts with your income to determine if you have access to enough money to keep up with your mortgage payments. Calculating your debt-to-income (DTI) ratio requires that you add your monthly debt payments and divide the total by your gross monthly income. From an underwriter’s perspective, the higher your DTI ratio, the more likely you are to default on your mortgage repayments.
• Verifying savings and down payment. You may expect your underwriter to take a look at your savings accounts. This is to ensure that you have adequate funds to supplement your income temporarily and to establish if you have enough money to put toward your down payment.
• Ordering an appraisal. It is the underwriter’s responsibility to order a home appraisal. This step helps determine if the desired loan amount for the property in question matches its actual market value.

Manual Vs. Automated Underwriting

Depending on the mortgage provider you select, the underwriter responsible for assessing your application might choose to proceed manually or use an automated underwriting program. While automated underwriting is typically faster, it comes with some limitations. For example, using automated underwriting software might not be the best idea when assessing applications of people who have inconsistent incomes. In some instances, underwriters gauge risk by using a combination of manual and automated underwriting.

How Much Time Does the Process Take?

Depending on how streamlined a lender’s underwriting process is, how busy a lender is, and whether or not the underwriter handling your case file requires additional information, the process might take anywhere from a few days to a few weeks. Typically, you may expect a loan application to close completely in around 30 to 50 days. How long it takes to close a loan application may well be a standard for selecting a lender.

Possible Outcomes

At the end of the underwriting process, you may receive one of the following decisions:

• Conditional approval. This implies you may need to submit additional documents such as tax forms, pay stubs, or proof of mortgage insurance. In some instances, underwriters might want to verify sources of large down payments. Once you meet the requirements, your underwriter approves your application.
• If your application is missing important documentation, making it impossible for an underwriter to verify the information you’ve provided, the underwriter might suspend your application. In this scenario, you need to provide the required documentation/information for the lender to reactivate your application.
• An underwriter might deny your application after going through your employment and financial information in detail even if you’ve been previously preapproved. You may take remedial measures depending on why your application is denied. Some of the reasons why an underwriter might deny your application include missing information in your application, a low credit score, no credit history, and a small down payment.

What You Need to Know About Getting a Mortgage

While different aspects require your attention when buying a home, getting a suitable mortgage remains among the most important. As a first-time homebuyer who’s looking for a mortgage, it is crucial that you abide by these tips.

Determine How Much You Can Afford

The first step of getting a mortgage is determining how much you can afford.  This involves accounting for your income, assets, expenses, debt, the desired location, and your creditworthiness. You also need to consider the down payment, closing costs, and relocation expenses. While conventional wisdom suggests that you put 20% of a home’s selling price toward the down payment, requirements vary for different types of mortgages. For instance, some government-backed mortgages require no down payment at all.

Check Your Credit, Strengthen It if Required

Check your creditworthiness by going through your credit reports. You get access to free copies from the top three credit bureaus in the country – TransUnion, Experian, and Equifax. If you find any errors, contact the credit bureaus in question to get them fixed, as they might have an adverse effect on your credit score.

If you don’t have good or excellent credit, work on strengthening it by following different measures. These include making all your repayments on time, bringing down your credit utilization ratio, and limiting how often you apply for new forms of credit.

Identify Your Alternatives

First-time homebuyers have the option of applying for conventional mortgages. However, they might qualify for other types of mortgages based on different eligibility criteria.

• USDA Loans. Backed by the United States Department of Agriculture (USDA), you might qualify for a USDA loan to buy a home in a rural area or in eligible suburban areas of cities (typically the outskirts). You might also qualify with less-than-perfect creditworthiness and low to moderate income.
• VA Loans. The U.S. Department of Veterans Affairs (VA) acts as a guarantor for VA loans. These loans are made available to military veterans, those still in service, select surviving spouses, as well as reservists. They come with lower-than-usual interest rates.
• FHA Loans. FHA loans are insured by the U.S. Federal Housing Administration. According to the Consumer Financial Protection Bureau (CFPB), borrowers with 10% to 15% down payment and good credit scores typically find conventional loans to be more cost-effective than FHA loans, whereas people who wish to make smaller down payments and have lower credit scores might benefit more by going the FHA loan way.

Compare Multiple Lenders

Narrow down on the top mortgage providers based on the type of loan you wish to get. Then, look at more than just the interest rates on offer. Other aspects that need your attention include different fees you might need to pay, flexibility in the loan’s terms, as well as the level of customer service the lender provides.

Get Preapproved

A prequalification involves an informal evaluation of your finances and comes with an estimate amount that a lender is willing to provide. A preapproval, on the other hand, requires delving deeper into your financial information and looks at your credit score, bank statements, and W-2s. As a result, this step gives you a more accurate number surrounding how much money you qualify to borrow.

Since getting preapproved gives you a clear indication of how much money you may borrow, you get to look for homes accordingly. A preapproval letter also works well in the eyes of real estate agents and sellers, as they know you’re serious about the process. Besides, once you have a preapproval in place, you minimize the possibility of getting nasty mortgage-related surprises down the down.

Mistakes You Need to Avoid

Here are some common home buying mistakes you need to avoid:

• Looking at homes before considering your mortgage alternatives
• Going over your budget
• Using all your savings for the down payment
• Dipping into your retirement fund for the down payment
• Making emotion-based decisions

Conclusion

The recent update to DU implemented by Fannie Mae serves as great news for a number of renters who are hoping to become homeowners – given that their regular rent payments will now play a role in their credit risk assessment. However, if you wish to buy a home in the near future, it is crucial that you start getting your finances and creditworthiness in order because these play important roles in the underwriting process.

Given that there is more to buying a house than getting a mortgage, going through Meadowbrook Financial Mortgage Bankers’ First Time Homebuyer’s Guide might be worth your while.

Fall brings with it a sense of reinvigoration that New Yorkers can never get enough of, with a near-perfect mix of warm and cool days, and some rain added in for good effect. Scores of people choose to head outdoors, for long walks, drives, and cruises alike. If you’re a relatively new homeowner in New York or have been around for a while but haven’t gotten around to exploring, you might be surprised to discover the sheer number of alternatives on offer.

No matter whether you live in New York City, Long Island, or Upstate, you may make the most of what fall has to offer without venturing too far, unless that’s what you prefer, in which case, your options increase significantly.

Exploring New York in the Fall

New York in the fall brings something for just about everyone, whether it’s admiring the changing foliage, visiting a vineyard, or heading to a museum. Here are some of the more popular routes that homeowners in New York take when fall comes calling.

Apple and Pumpkin Picking

Apple and pumpkin farms in and around New York are ideal for breathing clean and crisp air, while also taking in nature’s changing colors. While you get to pick apples and pumpkins, many farms also offer a slew of activities to keep everyone in the family occupied. Some of your top alternatives include:

• Harbes Family Farm. The Harbes Family Farm in Mattituck offers apple picking, pumpkin picking, hayrides, corn mazes, and even a spooky night maze. The Harbes Barnyard Adventure offers eight acres of family-friendly activities for which you need to pay an admission fee. An added bonus is the Harbes Vineyard, where you get to enjoy your wine outdoors or in the wine barn.
• Milk Pail U-Pick Farm. This u-pick farm located in Water Mill (in the Hamptons) offers only apple and pumpkin picking. You need to purchase a bag for picking.
• Fishkill Farms. Fishkill Farms is located in East Fishkill. It lets you pick apples, pumpkins, a variety of vegetables, and berries. Their pick-your-own packages typically include an entry for five people.
• Dykeman Farm. Dykeman Farm is in Pawling. It offers pumpkin picking, free hayrides, a play area for kids, and a farm stand that sells a variety of locally grown vegetables.

Farm Stands

Some of the best farm stands in the region that give you access to an array of fresh fruits and vegetables include:

• Sound Shore Market in Riverhead
• Stoneledge Farm in Leeds
• 8 O’clock Ranch at De Kalb Junction
• Fishkill Farms in East Fishkill

Apple Cider, Donuts, and Pies

There’s something about celebrating fall with apple cider donuts and pies of different types, and it probably has to do with the warmth they bring to the table and many a hearts. Some of the places that rate particularly well for their apple cider donuts include:

• Golden Harvest Farms, Valatie (apple cider donuts)
• Hanks Pumpkintown, Watermill (apple cider and pumpkin donuts)
• Union Square Greenmarket, New York City (apple cider donuts)

Here are some great alternatives if you fancy pies:

• Briermere Farms, Riverhead
• Monica’s Pies, Naples
• Pied Piper, Highland Falls
• Dolce Delight, Ithaca
• Grandma’s Pies and Restaurant, Albany
• Abu’s Homestyle Bakery, Brooklyn

Craft Brewers, Cider Mills, and Wineries

New York, with the Hudson Valley, in particular, was among the first wine-producing regions in the country, and some of the wineries in the state continue producing excellent vintages. With a significant number of breweries, cider mills, and distilleries now spread across the state, you are truly spoiled with options.  Here are some that warrant your attention.

Wineries

• Croteaux Vineyard, Southold. Located at Long Island’s North Fork, Croteaux Vineyard boasts of creating excellent Rosé wines, be it the ‘Jolie’ cabernet franc rosé, the merlot ‘Sauvage’ rosé, or the sparkling merlot ‘Cuvée’ rosé.
• Sparkling Pointe, Southold. Sparkling Pointe Vineyards and Winery produce sparkling wines by using the traditional Méthode Champenoise, and its grape varieties limit to ones classically used with champagne – Chardonnay, Pinot Meunier, and Pinot Noir.
• Wölffer Estate Vineyard, Sagaponack. Located in the Hamptons, Wölffer Estate’s extensive range of offerings includes reds, whites, rosé, ciders, spirits, and non-alcoholic beverages.

Cider Mills

• Riverhead Cider House, Calverton. The Riverhead Cider House in Eastern Long Island offers various naturally harvested apple ciders, local beers and wine, as well as a range of other apple products.
• Jericho Cider Mill, Jericho. Over 200 years old, Jericho Cider Mill offers fresh apple cider made using no preservatives. It also has a noteworthy selection of pies.

Breweries

• Jamesport Farm Brewery, Riverhead. This pet-friendly microbrewery brings to the table a collection of beers, ciders, wines, and cocktails. All the beers are brewed on-site, with ingredients that are grown on the farm. Its unique pumpkin beer has been around for a few years. The Catered Fork Food Truck does well to satiate one’s hunger. Depending on when you visit, you might get to enjoy some live music or standup comedy.
• Evil Twin Brewing, NYC. While the menus at this nano-brewery/taproom in Ridgewood and its taproom in DUMBO are different, what you may expect from both is an eclectic mix of hoppy beers, soda-style sours, smoothie-style sours, and pastry seltzers.

Fall Festivals

Come fall, New York is replete with festivals. All you need to do is look for a reason to celebrate, and attend one, two, or more. While pumpkins, apples, and a hint or more of spookiness are pretty much a staple, you may also expect rides, exhibits, local treats, live events, and more. Here are some fall festivals in New York that deserve your attention.

• Schmitt’s Family Farm Fall Festival. This festival will play out from September 19th to November 1st this year. The farm boasts of a seven-acre corn maze and the largest straw pyramid in Long Island. Also on offer are mini golf, animal and hayrides, vegetable and flower picking, and an elaborate farm stand.
• Harbes Annual Pumpkin Harvest. This fall festival is slated for September 25th and 26th. Other than giving you the ability to pick your own pumpkins and gourds, the festival will offer live music, where singer-songwriters Glenn Jochum and Cassandra House are set to perform. Musical hayrides and pig races are part of the parcel.
• Long Island Garlic Festival. Spread across two weekends, this Long Island festival will take place on September 11th-12th and September 18th-19th. Live music will play pretty much right through the festival. There’s a workshop on how to grow garlic, a garlic iron chef competition, a cooking demonstration, and a garlic-eating contest. An assortment of games, hayrides, pony rides and pumpkin picking aim to keep the young ones occupied.
• Fishkill Farms Fall Harvest Festival. You may head to this festival during any weekend from September 11th to October 11th. You may make most of the well-stocked Treasury Cider Bar while listening to live music, pick fruits and vegetables, or take lazy wagon rides. The farm has a three-acre corn maze too.
• Pumpkin Blaze. The Blaze at Hudson Valley is scheduled to take place from September 17th to November 21st at an 18th-century estate. This fall, thousands of hand-carved illuminated pumpkins will be a sight you surely don’t want to miss. Among other things, you may expect to experience an NYC streetscape, walk idly through an immersive river display, and enjoy fall-themed drinks and snacks. The Blaze at Long Island is set to take place from September 22nd to November 7th, in a 19th-century village. A new 80-foot circus train and sea monster will be the highlights here.
• Fall Festival at the Shoppes. While dates for this festival are not final yet, it is definitely set to take place this year. Local craft vendors, a farmer’s market, a craft fair, a grand carousel, and a scarecrow contest aim to keep you and your children busy and well-entertained.
• Village Of Tarrytown Halloween Parade. This year will witness the 19th edition of this parade, and it is to take place on October 23rd, with October 24th being the rain date. If you march with a theme as a group afloat, you stand to win prizes. If not, you still get to have fun at the block party, where there’ll be live performances, a DJ and plenty of food. You need to register if you aim to win a prize.

Fall Foliage Hikes

If you wish to experience New York’s fall foliage in all its glory, your best bet is to head upstate for a foliage hike. Some of your top options include:

• Pfeiffer Nature Center, Portville
• Buttermilk Falls, Ithaca
• Cranberry Lake Wild Forest, Clifton
• Great Bear, Fulton
• Finger Lakes National Forest, Hector
• Highland Forest, Fabius
• Thacher State Park, Voorheesville

Other Alternatives

Some other ways to explore New York in the fall include taking scenic drives, going on romantic getaways, digging into the region’s haunted past, experiencing treetop adventures, watching drive-in movies, visiting museums, and going kayaking.

How to Become a Homeowner in New York?

Given that mortgage rates are at near all-time lows, several renters in New York are hopeful of becoming homeowners in the near future. If you’re planning to buy a home in New York, you will, in all likelihood, need a mortgage. However, you need to address other aspects before contacting a mortgage provider.

Check Your Credit Worthiness

If you have average or poor credit, your chances of qualifying for a mortgage with an attractive interest rate will be challenging. Even if you end up getting one, you might have to pay a considerably high annual percentage rate (APR).  Start by going through your credit reports in detail and look for any possible errors, as these may bring down your credit score. If you find any errors, contact the credit bureaus in question and promptly rectify them.

Make all your payments on time, as this can help improve your credit score. It is also important that you keep your credit utilization ratio low. This refers to the credit you’ve used from your total available credit, and should ideally be below 30%.

Arrive at a Budget

Determine how much you may afford to spend toward your repayments each month after accounting for your income, expenses, and existing debt. You also need to factor in any unexpected expenses that might come your way in the future.

Save for Your Down Payment

Just how much down payment you need depends on multiple factors, including the type of mortgage you plan to get. However, conventional wisdom suggests that you pay 20% of a home’s selling price as a down payment. This way, you avoid paying extra toward private mortgage insurance (PMI).  Besides, the higher your down payment, the lesser you pay in interest charges through the course of your loan.

Narrow Down on a Mortgage Type

If you qualify for government-backed mortgages, you might benefit by having to make little to no down payment. For instance, USDA loans and VA loans come with zero down payment requirements. People who’re eligible for FHA loans may make 3.5%or 10% down payment.

When narrowing down on the type of mortgage that might work best for you, you need to choose between fixed-rate and adjustable-rate mortgages. In the case of the former, the APR remains the same for the entire course of the loan, which ensures that there is no unpredictability. You also need to establish how much time you might need to repay your mortgage as you can choose between 15-year, 20-year, and 30-year terms.

Get Prequalified

Select a lender based on aspects such as interest rates, fees, customer support, and flexibility in terms and conditions. Then, get prequalified. This gives you an indication of how much the lender is willing to lend to you, so you may look for homes accordingly. Besides, getting prequalified for a mortgage gives real estate agents and sellers an indication that you are serious about the process.

Conclusion

New York in the fall has much to offer for the entire family. All you need to do is make a plan and hit the road. With seasons changing colors and there being no dearth of activities from which to choose, do your best to take advantage of where you live and cross off as many items from your fall bucket list as possible. Whether it’s Thanksgiving or Halloween, it’s only fair that you and the ones you love have a good time.

If you plan to buy a home in New York this fall, start doing your homework. Once you’re checked your credit reports and arrived at a budget, consider contacting a mortgage provider.

 

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

 

The amount you’re willing to put toward your new home’s down payment helps your lender determine which type of mortgage suits you best and how much to lend. However, there is no standard answer to how much down payment you need when purchasing a house. While paying too much can have an adverse effect on your savings, paying too little can come with an increased monthly payment, interest, and fees.

In order to determine how much the down payment would work best for you, you need to take the specifics of your situation into account.

Requirements Vary According to Types of Mortgages

If you think you need to pay around 20% of a home’s selling price as a down payment, you’re not far off the mark. This typically holds true for conventional mortgages and comes with its share of benefits. However, you may also qualify for a conventional mortgage by paying 5% to 15% of a home’s price as a down payment by opting to pay for private mortgage insurance (PMI) as well.

Other types of mortgages have their own down payment requirements:

• U.S. Department of Veterans Affairs (VA) loans – meant for existing and veteran service members and eligible spouses – come with a zero down payment requirement.
• U.S. Department of Agriculture-backed USDA loans does not require any down payment. These are made available to rural and eligible urban homebuyers.
• If you qualify for a Federal Housing Administration (FHA) loan, you may pay just 3.5% as a down payment.
• Jumbo loans require that you pay 10% to 20% as a down payment.

Your creditworthiness can have an effect on the down payment requirement. For example, you may qualify for the 3.5% down payment requirement through an FHA loan only if your credit score is 580 or higher. Otherwise, you need to pay at least 10% as a down payment.

The Affordability Factor

Once a lender pre-approves your mortgage, you get an indication of the maximum loan amount you qualify to borrow. By this stage, you’ve already informed your lender about your income, assets, debts, and an estimated down payment amount. It is only after taking these factors into account and checking your creditworthiness does a lender determines how much to lend to you.

When it comes to how much you can afford to buy a house for, the general rule of thumb suggests that you should limit its price to two or two and a half times your annual income. As a result, if you earn $150,000 per year, you can afford a home that costs $300,000 to $375,000. If you plan to put 20% down on a property that costs $300,000, you will need to pay $60,000. Similarly, if you wish to pay 10%, it would amount to $30,000.

Instead of choosing to borrow the maximum that a lender is willing to lend, you need to take a close look at the estimated monthly mortgage payments you will need to manage. This is because if your monthly mortgage payments and other debts combined exceed your gross monthly income by 40% or so, you might have problems keeping up with your repayments.

It was only in 2020 that the requirement of having a debt to income ratio of 43% or less to qualify for a mortgage was removed through an amendment in the Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z). This requirement now depends on price-based thresholds.

Are You Buying a First or Second Home?

If you are an existing renter, you need to realize that there is more to buying a home than paying its selling price. For starters, you will need to pay closing costs. The national average closing costs for single-family homes stood at a little over $6,000 in 2020.

New home buyers also need to account for additional expenses that will come their way in the form of ongoing maintenance/repair costs, homeowner’s insurance, property taxes, as well as possible Home Owners Association (HOA) fees. Determine how much you should pay as a down payment only after your account for all these costs.

If you wish to buy a second home, bear in mind that most lenders require at least 20% as a down payment and some even ask for 25% or 30%. Besides, buying a second home limits the types of mortgages for which you may apply. For instance, you cannot get an FHA, USDA, or VA loan to fund the purchase of a second home.

Average Down Payment on Mortgages

Data released by The Ascent, a Motley Fool service, through its Average Down Payment on a House 2021 report, provides these numbers surrounding average down payments on houses in the U.S.:

• The first quarter of 2021 saw 48% of homebuyers making down payments of at least 20%.
• More than 20% of homebuyers made all-cash purchases during the same period.
• The average down payment for homes from July 2019 to July 2020 stood at 12%.
• Rhode Island, Washington, D.C., and Hawaii accounted for the highest average down payments in the country, whereas Montana, West Virginia, and Vermont stood at the bottom of the list. [1]

While average down payments give you some indication of how much you might need to pay, you need to arrive at the down payment that works best for you by considering your home buying goal, your financial profile, and your budget.

The Effect of Your Down Payment

Since the down payment is the biggest upfront cost you will incur when buying a home, you need to account for the effect it will have on your mortgage in the long run. This is because the interest rate you get from your mortgage provider and the monthly payments you need to make going forward vary depending on how much you pay upfront.

On Interest Rates and Monthly Payments

The interest rate that accompanies your mortgage is a key factor in determining the affordability of your monthly payments. When you make a large down payment, there is a distinct possibility that you can qualify for a better rate, and even a slightly lower rate will lead to significant long-term savings. However, it is important to weigh the impact of short-term costs with long-term savings before making a decision.

Consider this example of a conventional 30-year mortgage to understand just how your down payment affects the cost of your mortgage in the short- and long term. The cost of the house in both cases is $250,000.

Scenario 1

• Down payment – 10%
• Down payment amount – $25,000
• Interest rate –8%
• Monthly repayment – $1,425.49 for the first 66 months (with PMI), and $1,331.74 thereafter
• Total interest paid over the life of the loan – $152,425.45

Scenario 2

• Down payment – 20%
• Down payment amount – $50,000
• Interest rate –6%
• Monthly repayment – $1,192.62 (no PMI required)
• Total interest paid over the life of the loan – $127,344.65

In the second scenario where you make a 20% down payment and get a 0.2% lower interest rate, your monthly payments reduce by around $230 for the first 66 months, and nearly $140 for the remainder of your loan term. The total amount you would end up saving on interest would be a little more than $25,000.

While you end up paying more interest through the course of your mortgage in the first scenario, you will also need to make payments to cover for PMI until your loan-to-value (LTV) ratio drops below 80%. However, making a one-time lump sum payment of $50,000 might require that you rework your existing financial obligations and even consider dipping into your savings for retirement.

Looking at long-term feasibility is crucial when deciding how much down payment is ideal in your case. Once you take a look at the types of loans for which you qualify and determine the value of homes you can afford, you can see the difference that decreasing or increasing your down payment makes on your monthly payments and you can adjust accordingly.

On Lenders

While your income, assets, debt, and creditworthiness play a role in how much a lender might be willing to lend, mortgage providers look at how much you are willing to put toward a down payment when determining what interest rate should apply on your mortgage. It is commonplace for lenders to offer better interest rates to borrowers who make higher down payments.

In some instances, lenders require that borrowers make higher-than-usual down payments to offset the risk that might come with low credit scores. Conversely, you might qualify for a low down payment if you have excellent creditworthiness.

Lenders use the down payment amount to determine the LTV ratio, which, in turn, helps establish the risk that accompanies a mortgage.  The LTV ratio basically highlights the equity you have in the house. If you buy a house that costs $250,000, for example, and you make a down payment of $50,000 (20%), the LTV ratio amounts to 80%. Lenders look at LTV ratios of 80% and lower with favor, as it reduces their risk, which is why they offer more competitive interest rates in such cases.

Pros and Cons of Making a Large Down Payment

Making a down payment of 20% or more comes with various benefits:

• Lower interest. More often than not, a large down payment leads to a lower interest rate. In addition, by reducing the principal loan amount, you end up paying less interest over the life of the loan.
• Lower monthly payments. Through a lower interest rate and a reduced principal amount, you get to make lower monthly payments toward your mortgage.
• No need for PMI. As long as you pay at least a 20% down payment, you don’t have to worry about that added expense of PMI.
• Competitive edge. If you’re looking for a home in a competitive market, a large down payment can work in assuring the seller that you have enough money to go through with the deal. Lenders might also view your application with favor as a large down payment usually demonstrates financial stability.
• More equity. The amount you put toward your down payment has a direct impact on the equity you build in the house at the very beginning. The higher your down payment, the more the equity you hold.

Possible downsides of making a large down payment include:

• More time to buy a home. If you’re saving money to put toward your down payment, you might have to wait for a longer period to build a large corpus. This would mean paying rent for extra time, and you may also face the risk of an increase in prices.
• Reduced flexibility. If you’re going all out to make your down payment by depleting your savings or digging into your long-term investments, you leave very little room for flexibility to deal with unexpected expenses, be it in the form of home repairs or medical bills. In any such case, your money remains tied to the equity in your home and might be difficult to access in a hurry.

Making a large down payment is usually a good option, although it should not come at the cost of disrupting your other finances. Besides, there are other ways to reduce the cost of your mortgage as well.

Consider making a large down payment only if you have adequate savings to cover for any type of emergency as well as enough money to pay your closing costs. If you think your down payment is causing you to stretch beyond your means, you might want to consider lowering it a bit.

Conclusion

No matter how you plan to fund your down payment, determining just how much money you can afford to part with upfront is crucial. Not only does this have a bearing on how a lender views your application, but it also affects the overall cost of your loan. Besides, you may start making offers when you have a down payment figure in mind.

Arrive at an amount you can put toward the down payment only after taking your existing finances into account. Make sure you retain some money to address unexpected expenses in the future. If you’re unsure about what might work best for you, consider discussing the matter with your loan officer.

Resources:

[1] Caporal, J. June 2021. Average Down Payment on a House 2021: $27,850. The Ascent. Viewed August 20, 2021.https://www.fool.com/the-ascent/research/average-down-payment-house/

If there was a clear and well-defined roadmap that investors could follow to succeed in the world of real estate, just about everyone would jump on the bandwagon. However, while real estate investment brings with it the potential for significant financial growth, it also comes with risks. Given the complexities linked with investing in real estate, getting as much understanding about this asset class as possible is vital.

According to the Emerging Trends in Real Estate report released by PwC that takes the ongoing COVID-19 crisis into account, the value of single-family homes, data centers, and industrial property is expected to increase in times to come. However, investments in hospitality and retail may expect a drop. The report also suggests that just how well the country does in controlling the pandemic will have a bearing on how the real estate sector fares in the long run.

Here are the most important questions new real estate investors need to ask before taking the plunge.

1. Who Will Handle Basic Repairs?

If the property you purchase requires basic plumbing, electrical, or any other type of work, would you be able to carry it out yourself or would you require professional assistance? If you opt for the latter, this expense will eat into your profits. As someone who is starting by investing in one or two properties, it may make sense to try and do minor repair work on your own, provided the work does not require a building permit and you can perform the repairs in a safe manner. When you move forward and build a bigger portfolio, you may put together a reliable team of handymen and contractors.

2. Do You Have a Real Estate Investment Strategy?

New real estate investors should have a strategy in place even before they spend their first dollar. There are several variables and factors that affect real estate investments. Without carrying out the required market research and formulating a suitable real estate investment strategy, getting sidetracked becomes a distinct possibility.

Those who are new to this realm should formulate strategies based on their own investment goals, and stick to them. You might have to fine tune your strategy in the future.

There are three main strategies that real estate investors follow, which include opportunistic, value-add, and core. In addition, investors also need to choose from different types of properties such as land, residential, and commercial. While one investor might benefit by looking for opportunistic fixer-upper homes, another might do better by going the buy-and-hold way.

3. What is Your Financial Goal?

Another question that begs to be answered is whether you have a financial goal as a real estate investor. Do you want to start as a part-timer or do you plan to devote all your time and energy toward real estate investment? In addition, do you wish to purchase and hold on to a property and make a profit after it appreciates, while also generating passive rental income all along? Or would you rather flip a house and make a quick profit?

Before you start investing, try and make as accurate a calculation as possible assessing whether you might end up losing money in the first few months, the point at which you may break even, and how much you might make after three to five years.

4. How Accurate Are the Model Assumptions?

Just about every private real estate investment comes with the promise of high returns at the beginning. However, while a few exceed expectations, there are some that even end up in the red. Unfortunately, tweaking just one or two of many variables gives real estate investment managers the ability to make any investment appear lucrative.

Instances of real estate investment managers building models with the sole aim of attracting investment are not uncommon. On the other hand, there are managers who create model assumptions while being as realistic in their projections as possible. One way to find out if investment managers are following the right approach is to question all the assumptions in their models.

Making note of the projected internal rate of return (IRR) is important. If the same sector presents 10 different opportunities with IRR projections ranging between 15% and 20%, achieving a 30% or 35% IRR may well be far-fetched. Conversely, deals that come with seemingly achievable IRRs might work well for you.

Take a look at the exit cap rate assumption and determine if it comes with a built-in cushion to account for risk through increasing rates. Exit cap rates, more often than not, are 50 to 100 basis points above existing rates.

5. Do You Have a Good Team?

Even though you might think you can handle your real estate investments on your own, you need to understand that people who succeed in this realm have reliable teams. Real estate investors should ideally start building their teams right from the time they’re looking for their first property. In addition, all your team members should be knowledgeable and passionate about this field.

Know that putting a successful team together might take some time, and you might have a few hits and misses along the way. The key is to keep going until you have the best in each class working with you. By the time you’re done, your team should include:

• A real estate agent who specializes in investment property
• An accountant who knows all the nitty-gritty involved in investment property income taxes
• An attorney who has in-depth knowledge of real estate as well as contract law

6. Should You Seek Finance or Invest Your Own Money?

The answer to this depends on any investor’s individual goals. For instance, if you’re looking at generating a positive ongoing cash flow, using your own money might be the way to go. Consider this example – you make a $100,000 investment and end up with 9.5% annual returns (or $9,500) after accounting for rental income, income tax, property tax, and deprecation.

Going the financing way might help you get higher returns. With the same $100,000 example, you pay 20% (or $20,000) as down payment. Using an estimated interest rate of 4% on the $80,000 mortgage, earnings stand at around $5,580 per year after accounting for additional interest and operating expenses. This return of around 30% on the down payment amount is significantly higher than the 9.5% you’d make investing $100,000. However, your cash flow in this scenario would be lower.

6.1 How Do You Plan to Get Financing

One way to get the required funds for your investment property is to tap into the equity you’ve built in your own home. In this case, you might be able to borrow up to 80% of the equity value and use the proceeds to buy your second home.

If you plan to fix and flip a home, thoughts about getting a fix-and-flip loan or a hard money loan might cross your mind. While these short-term loans are typically more easy to qualify for than a Conventional property investment loans, they come at a considerable cost. This is because interest rates and associated fees can be staggeringly high.

Getting an investment loan to purchase a property is not the same as getting a loan to purchase a second home. To qualify as a second home, the property you purchase needs to be at least 50 miles from your primary residence. With an investment loan, there is no such limitation. However, getting an investment loan to purchase a home might require that you pay at least 20% as down payment, and that you have two or more years of experience in managing properties.

7. Where is the Property Located?

The location of the property you wish to invest in has a bearing on your long-term expenses. For instance, will commuting to and from the property require no more than spending on gas, or will you have to pay additional transportation fees such as airfare, or train tickets? In addition, the further away a property is from your existing home, the longer you will spend commuting. Consequently, you might also lose out on productivity.

New real estate investors are typically better off choosing properties that are closer to where they live.  As long as your property is no more than a drive away, dealing with tenants and service providers remains fairly easy.

If you wish to invest in out-of-state properties, consider waiting until you get more experience. However, this rule is not set in stone, and there may be exceptions where out-of-state investments are the way to go. For example, the region you live in might not offer a desired IRR, and looking further might be the order of the day.

8. Have You Weighed the Pros and Cons?

Just about any financial decision requires that you determine its pros and cons at the very onset. As with other types of investments, real estate investments also come with their share of rewards and pitfalls.

Pros

• You get time to focus on your regular job while earning passive income at the same time
• An increase in real estate value translates into higher returns
• All the interest you pay toward a loan for an investment property is tax-deductible from investment income
• The Social Security tax does not include the rental income you earn in your taxable income
• You can include your real estate investment in a self-directed IRA (SDIRA)
• Barring major turmoil in the market –as experienced during the financial crisis of 2007-2008, – the real estate market typically displays more stability than the stock market
• Real estate investments are tangible

Cons

• Dealing with tenants can seem daunting, and hiring a property management company comes at a cost
• You might have to deal with high entry and exit costs
• You cannot depend on your rental income to cover for your mortgage payments
• In the absence of tenants, you still need to keep paying relevant taxes and spend money on maintenance
• If you need money quickly or if the market is taking turn for the worse, selling your property in haste might not be possible
• If your adjusted gross income (AGI) exceeds $200,000 in case you’re filing as an individual or $250,000 if you’re filing as a married couple, you need to pay a surtax of 3% on all your investment income (rental included)

9. Have You Thought About Getting a Real Estate License?

Getting a real estate license comes with advantages and disadvantages. Having one gives you unhindered access to countrywide multiple listing services (MLS), and it opens up a completely new channel for networking. A license also gives you the ability to take home a larger cut, because you don’t have to pay a percentage of your profit to the agent who might otherwise have worked for you.

A distinct advantage of not having a license is that diversifying your deals becomes simpler because you can then work with multiple agents who specialize in specific areas. Besides, getting a real estate license comes at a cost, and you will also need to devote time and energy to the process. The decision eventually boils down to your investment goals.

10. How Will You Structure Your Company?

Individual real estate investors have the option of registering as sole businesses or S Corporations. However, most real estate businesses in the U.S. are structured by forming limited liability companies (LLCs). This is because LLCs operate as distinct and separate legal entities. Simply put, an LLC can use its own name to carry out business, open bank accounts, and get a tax identification number. LLC owners, referred to as members, have limited liability. This typically ensures that they do not hold personal liability for the LLC’s liabilities and debts.

Conclusion

Since real estate investments come with risk, doing your homework is crucial, and it is equally important that you keep learning. As a new investor, start by picking a single niche so as not to complicate matters in the early stage of your venture. Once you become comfortable, move forward.  Make sure you never stop networking, because the more the relationships you manage to build as a budding investor, the better off you’ll be when you begin experiencing growth.

Bear in mind that it is normal to get inundated by doubts and questions as a beginner.  However, once you’re clear about why you’re entering this realm in the first place and what your goals are, the path becomes simpler. If, at any stage, you are unsure about the way forward, seek professional assistance, be it through an investment manager, a mortgage provider, a real estate agent, or a real estate attorney.

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

When you wish to get a mortgage to purchase a home, you need to start by narrowing down on a suitable lender. You may choose to get prequalified for a loan as this gives you an indication of how much a lender is willing to lend to you. To show a seller that you are genuinely interested in making a purchase, a preapproval will hold you in good stead. Once you’ve narrowed down on a house and signed a sales contract, a mortgage commitment letter follows.

What is a Mortgage Commitment Letter?

A mortgage commitment letter indicates that your lender has approved your application for a loan, provided you meet some conditions. Once you sign the document, it comes into effect. This letter helps because it indicates to a seller that you are ready to put money on the table. Lenders issue these letters only after completing the underwriting process.

What’s in a Mortgage Commitment Letter?

The letter includes your contact information as well as that of your lender, and the address of the property you wish to purchase.  You may expect your mortgage commitment letter to highlight the type of loan, the loan amount, the interest rate, the loan term, as well as the expiration date of the commitment.

Your lender will also include other terms and conditions linked to the mortgage in this letter. For instance, if your lender requires that you have an escrow account, you will find a mention of the same in the letter.

Prequalification to Preapproval to Commitment

You need to follow a fairly conventional approach when getting a mortgage, wherein you get approval from your lender at three different stages.

Prequalification

Getting prequalified for a mortgage happens during the early stages of your home buying journey. This step gives you an indication of how much you can afford to borrow and how much your mortgage provider is willing to lend. However, prequalification comes with no guaranty that the lender will give you a loan.

This process is fairly straightforward. You are required to provide basic information surrounding your income, expenses, assets, and debts. Your lender might pull up your credit report during this stage to review your creditworthiness and verify the information you provide.

Most lenders don’t charge any fees for prequalification. Depending on the lender you select, you might be able to complete the process online or over the phone. If you qualify, you may receive your prequalification letter within a day or two.

Preapproval

Most people suggest getting a preapproval as it indicates that you are serious about buying a home, and also that you’re eligible for a mortgage. This is because you get a preapproval only after completing a formal application, where a lender delves deeper into your past and existing finances.

Getting preapproved requires that you provide bank, asset, and credit statements, as well as your Wage and Tax Statement (W-2). If the lender has not checked your credit report yet, it will at this stage. All this information helps the lender arrive at a decision and also helps it determine the loan’s terms and conditions.

Commitment

With preapproval out of the way, you can narrow down on the house you wish to purchase. After making an offer and signing a sales contract, you can ask your lender for a mortgage commitment letter. Your application then goes through an underwriting process. Your lender will also ensure that there are no additional liens attached to the property and that it is not subject to any dispute.

Upon successful completion of the underwriting process and the home’s appraisal, your lender will issue a letter of commitment. This indicates that the lender has approved your application as well as the property in question.

The Role of an Appraisal

While your income and creditworthiness play important roles in your ability to get the final approval for your mortgage, so does a satisfactory appraisal of the home you wish to purchase. The lender bases the amount of your loan on a percentage of the home’s appraised value.  This percentage is expressed in a ratio referred to as “Loan-to-Value” or “LTV.” This is because lenders wish to safeguard their interests, in case of borrowers end up defaulting on their loans.

Consider this example. A lender pre-approves your application for a $200,000 mortgage and agrees to lend up to 90% LTV. However, the appraisal returns a value of only $160,000. As result, the loan amount your lender will approve in the mortgage commitment letter will not exceed $144,000.

Types of Commitment Letters

There are two types of mortgage commitment letters. One is referred to as conditional whereas the other one is final/firm.

Conditional Commitment

More often than not, lenders issue conditional commitment letters. These imply that lenders agree to provide mortgages, as long as applicants meet predetermined conditions within a stipulated timeframe. Conditions may vary from one lender to another, and some of the most common ones include:

• Signing a purchase agreement
• Availability of funds for the down payment and closing costs
• No significant change in an applicant’s income or creditworthiness
• Submitting all required documents
• Successful inspection of the home
• Submitting proof of homeowner’s insurance
• Verifying proof of title
• Getting final underwriting approval

Details you may expect to find in a conditional mortgage commitment letter include:

• Your lender’s name and contact details
• Your name and contact details
• A statement of commitment
• The type of loan
• The loan amount
• The conditions you need to meet for the approval to hold ground
• The time period for which the commitment is valid

Final/Firm Commitment

Your lender will issue a final/firm mortgage commitment letter once you meet all required conditions.  These letters tend to include the following information:

• Your lender’s name and contact details
• Your name and contact details
• A statement of commitment
• The type of loan
• The loan amount
• Duration of the loan
• Interest rate
• Date of commitment and its expiry date
• The expiry date of the rate lock

Importance of Getting a Mortgage Commitment Letter

Getting a mortgage commitment letter is not a necessary part of purchasing a home because you may move forward with just a preapproval. However, getting a commitment letter ensures that you will get the required money to pay for your home’s purchase in time. Besides, this can make a significant difference in competitive markets, giving you a distinct edge over other prospective buyers who don’t have commitment letters.

Sellers view commitment letters with favor because they know there won’t be any surprises with buyers’ financing from the time of signing the sales contract to closing on the property.

How Do You Get a Commitment Letter?

Getting a mortgage commitment letter requires going through a complete underwriting review that will look into every aspect of your financial situation. Most lenders follow these steps.

• Loan application. You need to complete a mortgage application by providing varied information surrounding your finances.
• Loan processing. You provide all required supporting documents to your loan officer. This process involves verifying your identity, as well as going through your employment history, bank statements, pay stubs, W-2s, and details about your existing assets and debts.
• Underwriting. The loan officer collates all the information and documentation and passes it on to an underwriting team. An underwriter then goes through your file to look for accuracy, completeness, errors, and discrepancies. This is typically a time-consuming process as it requires re-verification.
• Conditions. It is common for underwriters to include conditions in commitment letters. For instance, just about every conditional commitment letter requires a property appraisal. You might also need to provide additional documents surrounding your finances or opt for title commitment.

The Commitment Letter’s Expiry

All mortgage commitment letters come with expiry dates. While the usual duration of commitment is 30 days, it can vary from one lender to another. If the commitment letter expires before you go through the closing, you might have to get a new commitment letter by resubmitting your documents and going through the underwriting process again.

Upon the letter’s expiry, the lender is no longer obligated to provide a mortgage according to the previously stated conditions. While going past the expiry date of the commitment letter can result in delays, there could be a change in the interest rate and other terms as well.

You Have a Commitment Letter – Now What?

Once you receive a mortgage commitment letter, go through it carefully and determine if it is a conditional or a final commitment. If it’s conditional, look at all the conditions you need to fulfill in order to get the mortgage and determine if they’re in line with your expectations. If you receive a firm commitment letter, you may shift your focus to dealing with the closing.

Conditions that are beyond your control include ones related to a home’s appraisal. Bear in mind that lenders are very wary of lending money that might be more than a home’s value, which is why they are meticulous about the process. Since the appraisal goes through underwriting review, a lender can even offer a mortgage amount that is lower than a home’s appraised value. If you find such a clause in your commitment letter, speak with your lender to understand why, when, and how it might enforce the override.

Ideally, your purchase offer should come with a firm commitment letter.  If not, you need to determine what you can do to get one at the earliest.

Are Commitment Letters Set in Stone?

Whether or not a commitment letter is legally binding depends on the language that your lender uses in the letter. If you’re unsure or concerned about this aspect after going through your letter, you may consider seeking legal advice from a real estate attorney.

While a commitment letter is similar to a pledge that a lender will provide a mortgage to a borrower, it becomes final only after the borrower meets all the conditions listed in the letter. As a borrower, you are under no obligation to take the loan until you sign the closing documents and your lender funds your mortgage.

Getting Started

If you plan to purchase a home by getting a mortgage, narrowing down on a suitable lender should be among your first priorities. After selecting a suitable mortgage provider, consider getting a preapproval even if your lender prequalifies your application. This is because preapproval involves going through your application more carefully, and gives you a better indication of how much you might be able to borrow.

Choosing a mortgage provider requires that you compare your alternatives across different parameters. These include:

• Interest rates on offer
• All loan-related fees
• Flexibility in terms and conditions
• Customer support

Identify Your Options

Since you can get different types of mortgages, take time to determine which might work best for you.

• Interest. A fixed-rate mortgage comes with an interest rate that remains the same for the entire loan term. The interest rate of an adjustable-rate mortgage (ARM) tends to remain fixed for the first three to five years and then changes monthly or annually based on existing market rates.
• Loan terms. The most common loan terms are 15 years, 20 years, and 30 years. Typically, lower the loan term, lower the interest.
• No down payment loans. Depending on whether you qualify, you may get a no down payment loan through the U.S.Department of Agriculture or the U.S. Department of Veteran Affairs.

Conclusion

A mortgage commitment letter brings with it peace of mind in knowing that your lender will disburse your loan as long as you meet the required conditions. This letter can come in handy in any competitive market, where multiple buyers are vying for the same property.

Remember that you cannot get a commitment letter in a hurry because your lender wants to take all possible measures to safeguard its interest. As a result, once you decide to buy a home, getting in touch with a lender should be the next logical step.

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

Once you’ve saved money for a down payment, narrowed down on a house you wish to buy, and received approval for a mortgage, having to deal with closing costs might catch you by surprise. This is because these closing costs can amount to be a tidy sum. No matter whether you wish to purchase a home or get your mortgage refinanced, you will need to pay closing costs.

How Closing Costs Work

Closing costs may vary depending on the state in which you reside, the type of mortgage you get, and your mortgage provider. Typically, on a home purchase, they range from 2% to 6% of a home’s selling price. For example, if you buy a house for $150,000, closing costs may vary between $3,000 and $9,000.

Closing costs are typically categorized into property-related fees and mortgage-related fees. While the former relate to expenses incurred by lenders in evaluating properties, the latter refer to costs involved in processing your mortgage application.

Closing Disclosures and Loan Estimates

The law requires lenders to provide Loan Estimates within three business days of receiving mortgage applications. In addition to other important information related to your mortgage, it also indicates estimated closing costs. While these are not exact numbers, they give you a fair indication of what you might expect to pay.

You should receive a Closing Disclosure form from your lender three days before the date of the actual closing. This includes the originally estimated costs as well as the final costs. If you notice a significant discrepancy between the two, consider contacting your real estate agent or lender sooner rather than later.

Disparity in Closing Costs Across the U.S.

Data released by ClosingCorp in March 2021 highlights how average closing costs for purchase mortgages in 2020 varied across the U.S.

• The national average closing costs for single-family properties stood at $6,087, including taxes (a 5.9% year-on-year increase); and $3,470, excluding taxes (a 3.9% year-on-year increase).
• District of Columbia was the state with the highest average closing costs, including taxes ($29,329), followed by Delaware ($17,727) and New York ($13,261).
• District of Columbia was the state with the highest average closing costs, excluding taxes ($6,250), followed by Hawaii ($5,599) and New York ($5,571).
• Counties with the highest average closing costs, including taxes are New York (NY), Kings (NY), District of Columbia, Queens (NY), and Bronx (NY).
• Counties with the highest average closing costs, excluding taxes are New York (NY), San Francisco (CA), Nassau (NY), San Mateo (NY), and Marin (CA).

Who is Responsible for Paying Closing Costs?

At the closing table, buyers, as well as sellers, have financial obligations to settle. Local and state rules tend to have a bearing on just how much they need to pay during closing. While a buyer is typically required to pay loan-related costs, a seller needs to pay commissions owed to real estate agents and other fees related to transferring title to the property.

In case you’re refinancing your existing mortgage, you alone are responsible for all closing costs. According to an official statement released by the Mortgage Bankers Association, people refinancing their Fannie Mae and Freddie Mac mortgages will now be burdened by a 0.5% adverse market fee.

Why You Need to Pay Closing Costs

Real estate transactions are not particularly straightforward and tend to involve multiple stakeholders. Various states across the country require more than basic home inspections where you hire inspectors on your own, and this hold true for some types of mortgages as well. In addition, you also need to pay for different services right from when you apply for a loan to its final closing.

Common Closing Costs

Below are some of the most common closing costs that will find mentioned in the Closing Disclosure form provided by your lender.

• Application fee. You might need to pay mortgage application fees depending on the lender you select. While some lenders require that you pay this fee when you apply for a mortgage, some others include it in closing costs.
• Appraisal fee. Typically paid by buyers, you might get a seller to pay this fee through negotiation. Often required by lenders, appraisals give them the ability to determine if the selling prices of homes are in line with the fair market values in the area. Average appraisal fees across the U.S. stand at $375to $450.
• Attorney fee. You or the seller might pay attorney fees for preparing, reviewing, and recording all official documents. Using the services of attorneys to handle real estate transactions is not a legal requirement in all states. Attorneys often charge by the hour.
• Courier fee. Typically fairly nominal, you might need to pay this fee if your lender has to send documents to you via courier.
• Credit report fee. Not all lenders charge this fee. Ones who do usually charge $15 to $30– the cost incurred in pulling your reports from the three main credit reporting bureaus.
• Escrow deposit. Depending on your lender, you might need to pay a deposit that covers two months of payments toward mortgage insurance and property tax.
• Flood determination and monitoring fee. You might need to pay this location-specific fee when your lender requires a certified flood inspector to establish if the home you wish to purchase is in a flood zone. This fee also covers ongoing inspection to monitor any change in a home’s flood status.
• HOA transfer fee. When you buy a townhouse, a condominium, or a home in a planned development, you will need to become a member of its homeowners’ association (HOA). Make sure the home is in good financial standing by checking the HOA’s records. You might need to pay an HOA transfer fee to cover for costs involved in transfer of ownership.
• Homeowners insurance. Several lenders require that buyers pay homeowners insurance premiums for the first year in advance, at the time of closing.
• Lender’s title insurance. This fee paid to title companies safeguards lenders in scenarios where initial title searches do not show existing liens or ownership disputes.
• Lead-based paint inspection fee. If you plan to purchase a home built prior to 1979, you might need to pay this fee to get a certified inspection. The national average cost for lead paint inspection stands at a little over $300.
• Loan origination fee. Not all lenders charge this fee. Ones who do, do so to cover administrative costs involved in processing your application. Ones who don’t tend to quote higher interest rates to cover those same costs. When charged, this is around 0.5% to 1% of the loan amount.
• Owner’s title insurance. This optional coverage safeguards you in case you end in an ownership dispute after your purchase. The cost of getting owner’s title insurance is around 0.5% to 1% of the purchase price.
• Pest inspection fee. Pest inspections are mandatory in some regions as well as with some government-backed mortgages. The average pest inspection fee is around $100. However, it may vary from $50 to $300.
• Private mortgage insurance (PMI). You need to pay for PMI if you end up putting less than 20% toward your down payment. Your lender might require that you pay the first month’s premium at closing.
• Property tax. Prepare to pay pro-rated property taxes that would apply from closing’s date to the end of the ongoing tax year.
• Rate lock fee. This fee, when charged by lenders, gives you the ability to lock an offered rate for a predetermined time period – which can be from preapproval to closing. Some lenders provide this service for free. Others may charge 0.25% to 0.5% of the loan amount.
• Recording fee. You might need to pay this fee to your city or county clerk’s recording office in order to officially process public land records. This may set you back by around $125.
• Survey fee. You will need to pay this fee if your purchase involves using the services of a surveying company. This is done to confirm the boundaries of a property. Survey fees usually range from $300 to $500. However, you might have to pay more if a property is very big or has an unusual perimeter.
• Title search fee. Title companies charge this fee to look for ownership discrepancies by going through public records. The process also verifies if the property has any outstanding liens. Title search fees vary between $200 and $400.
• Transfer tax. You might need to pay a transfer of title tax based on the region in which you purchase a property.
• Underwriting fee. Your lender will charge this fee to cover for costs incurred in the evaluation and approval of your application. This process involves verifying your employment and financial information. You might need to pay up to $800 as underwriting fees.

VA, USDA, and FHA Loans

If you get a United States Department of Veterans Affair (VA) loan, you need to pay a loan funding fee, which is a percentage of the amount you borrow. The fee varies depending on an applicant’s military service classification. This fee does not apply for some service members.

Getting a United States Department of Agriculture (USDA) loan requires that you pay an upfront guarantee fee of 1% of the loan amount. This is in addition to the 0.35% annual fee.

People who get Federal Housing Administration (FHA) loans need to pay an upfront mortgage insurance premium (UPMIP). It stands at 1.75% of the loan amount. You may pay this at closing to choose to roll it into your mortgage. An annual insurance premium of 0.45% to 1.05% also applies.

How Do Points Work?

Points refer to optional upfront payments that borrowers make to lenders with the aim of reducing their interest rates. One discount point amounts to 1% of the amount you borrow. When mortgage rates are low – as is currently the case – paying for discounts points might not be in your best interest.

Can You Avoid Paying Closing Costs?

If you plan to get a mortgage to purchase a home or to refinance an existing mortgage, you will have to pay closing costs of different types. However, while there is nothing you can do about costs surrounding paying taxes, you may try to lower some expenses during closing.

If you’re a first-time buyer, know that you negotiate with the seller to include closing costs into the sales price. Consider this – a seller wants $150,000 for a home, and the purchaser’s closing costs amount to around $5,000. By making an offer of $155,000, you can get a credit to cover the closing costs. This way, while the seller stills gets the money that is rightfully due, you get to lower out-of-pocket expenses at closing.  As a buyer, you may even try to negotiate a credit on closing costs with your lender in lieu of a slightly higher interest rate.

Prospective homebuyers who are unable to afford closing costs may consider seeking homebuyer assistance through loan programs or grants provided by local and state government bodies as well as their employers.

Conclusion

Getting in touch with a lender and speaking with a loan officeris the first thing you should do when trying to determine all the costs you might incur when buying a home. That is one of the main reasons why most experts suggest getting preapproved before beginning your search for a home. Given that different factors go into determining how much you might need to pay as closing costs, you need to be as specific about your requirements as soon as possible with your mortgage provider.

It is fairly common for buyers to underestimate closing costs, which is why it is best to get an indication in advance. Doing so also helps you budget for these costs accordingly. While most buyers prepare themselves to account for the actual cost of their homes, many end up dipping into their savings to cover closing costs. Fortunately, reducing the overall cost of your mortgage, as well as its closing costs, is possible if you pay your cards right.

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

Additional resources:
https://www.investopedia.com/terms/o/origination-fee.asp
https://www.zillow.com/mortgage-learning/when-to-lock-mortgage-rate/
https://wallethub.com/answers/hl/how-much-does-a-land-survey-cost-273/
https://www.investopedia.com/mortgage/mortgage-guide/closing-costs/

Just when the country was getting ready for its spring home selling season in 2020, the COVID-19 pandemic struck and put a spanner in schemes of many things. While the real estate market has experienced considerable twists and turns since then, it seems poised at a relatively good juncture for now.

According to recent data released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, sales of new residential homes across the country stood at a seasonally adjusted annual rate of 775,000 in February 2021, up over 8% from 716,000 in February 2020.

Why Is the Spring of 2021 a Good Time to Sell?

Now that we’ve crossed the one-year mark of living with the COVID-19 pandemic, it is fair to expect people to get about with the plans they’d previously put on hold. In the real estate sector, this means that sellers who’ve been waiting on the sidelines will start reviving their plans, as will buyers who’ve put their plans on hold. This also applies to people who’ve wanted to downsize – by selling their existing homes and buying smaller ones.

Interest Rates to Remain Low

One of the main factors that drove the housing market in 2020 was historically low interest rates on mortgages. People who wish to purchase homes in 2021 can take heart in knowing that most experts expect interest rates to remain low through 2021 too. Consider this – the average interest rate for a 30-year fixed-rate mortgage stood at 3.13% on 8 April, 2021, down 0.20% from a year before. The drop was close to 0.5% for a 5/1-year adjustable rate mortgage.

Possibility of a Larger Inventory

A low inventory in most parts of the country over the last year has led the housing sector to predominantly become a sellers’ market. Buyers continue to scramble for opportunities, and bidding wars have become rather commonplace in most major markets. With the vaccination drive gathering considerable momentum, there is hope that the housing market might return to normal soon.

As a result, many homeowners who wish to sell their homes and were reluctant until now might decide to put their homes on the market before it gets flooded with more inventory. However, it does not appear that the housing market will cool off in the immediate future.

Multiple Offers to Stay

Given the existing shortage of inventory, sellers may expect to keep getting multiple offers, at least in the months to follow. Even though more homes are making it to the market, catching up with the growing demand is bound to take some time. This is especially true of homes with large outdoor spaces in booming suburban markets, because there is an increase in demand for such homes owing itself to the new work from home lifestyle.

Spring Brings Buyers in Droves

If you are to look at statistics surrounding home sales in the country based on seasonality, you will notice that spring is the busiest period. Data released by the National Realtors Association (NAR) suggests that sales-related activities increase by around 35% in February and March. However, historically, the greatest number of sales take place in May, June, July, and August.

One reason why spring finds favor with buyers is that they want to take a month or two to settle down in their new homes before the beginning of a new school year. Another reason is that the days are longer, and the weather is more conducive to stepping out and looking at homes.

Tips to Increase Your Home’s Presale Appeal

Sure, now is a good time to sell a home, all the more so because of a shortage of supply. While home sales have risen steadily over the last few years, it is important that you do not get complacent about the process. Remember that most buyers tend to know how to spot possible shortcomings and have relatively high expectations. Besides, you can expect buyers to carry out research about buying homes during the spring prior to beginning their search.

From a seller’s perspective, you need to do the best you can do to up your home’s value. However, it is equally important that you don’t go overboard, or there’s a risk that you may realize a poor return on investment (ROI).

1. Let There Be Light

Spring brings with it plenty of light, which you need to take advantage of by opening your home’s windows. Besides, it’s not just light, but the freshness in the air that also permeates through into your home. Other than making homes feel more aesthetic, an abundance of light also helps make rooms look bigger. If your home, or any particular room, does not have enough windows, use additional ceiling or floor lights to brighten up relatively dark corners.

If you’re thinking about adding a skylight to increase light in any particular indoor space, you might want  think again. This is because while some prospective buyers would appreciate the additional light and energy saving during colder months, others could view them as a source of leaks, water damage, and unwanted heat during the summer.

2. Give the Exterior a Makeover

Just about every professional associated with the housing sector can vouch for the importance of improving a home’s curb appeal before putting it on the market. According to a study released in the Journal of Real Estate Finance and Economics, homes with great curb appeal fetched 7% more money than comparable homes with poor curb appeal. The number rose to 14% in slow markets, where buyers are typically particular with the features.

For the uninitiated, curb appeal refers to how attractive a house looks when viewed from outside or a short distance. Fortunately, getting your house to look good from the outside is not as hard as one might imagine.

• The yard. Among the first things that catch the attention of prospective buyers is the home’s yard. With winter behind us, it’s normal for yards to appear littered and messy. If your yard is bereft of flowers and other types of foliage, now is a good time to start.  Plants with colorful flowers around the perimeter of the yard can work wonders in reflecting the vibrancy that comes with spring.  Make sure the shrubbery is neatly trimmed and keep weeding your yard at regular intervals.
• The driveway. Not many people need to reseal or completely redo their driveways when selling their homes. However, your driveway should not reflect poorly on your home. For instance, a driveway that is full of cracks or weeds will not seem appealing to a prospective buyer. Power washing your driveway provides an easy means to get rid of seemingly hard to remove oil stains. You may also use a power washer to clean your yard’s siding.
• The roof. Ignoring the condition of your home’s roof is never a good idea, all the more so when you plan to sell. This is because an old or damaged roof never makes a good impression. In addition, buyers generally wish to avoid making significant expenses after purchasing homes. Depending on the condition of your home’s roof, consider if it requires a replacement or merely minor repairs.
• The front door. Not quite in, but almost there, your front door serves as an indication of what one might expect inside. As a result, make sure that it is newly painted and completely functional. Depending on the importance of your door’s existing condition, you might consider getting a new one too. A front door that you need to open with a struggle or one that creaks every time you open or close it is likely to create a poor impression.  Keep the surrounding areas clean as well.
• A porch or a patio. If your home has a porch or a patio, make sure it’s in good shape because spring is perfect for spending time under the sun. If a walkway leads up to it, add some colorful plants along the way.

3. Look for Pending Repairs

How well a house is maintained has a direct bearing on its selling price. When homebuyers come across several pending repairs in your home – on their own or through a professional home inspector – they might be inclined to look elsewhere or make a lower offer. Before putting your house on the market, make sure the following are up to the mark:

• Foundation and structure
• HVAC system
• Electrical systems (including wiring)
• Plumbing
• Appliances
• Chimneys

While you’re at it, check for dampness, mold, and mildew in bathrooms and the basement as well.

4. Say Goodbye to Clutter

A cluttered home can be quite a turnoff for a prospective buyer. However, it’s only natural for clutter to creep in after you’ve spent a considerable time living in the same home. When de-cluttering your home, it is important that you focus on one space at a time. You might be surprised to see just how much you can get in order. If you end up with a lot of items you no longer need, you may consider selling them online or having a garage sale.

5. Personalization No More

Try to remove just about anything that personalizes your home. This is because if there’s an overt display of personalization, prospective buyers might find it hard to imagine how they could use the space. While this does not mean that your home should not be inviting, you need to strike a balance between neutral and warm. Areas that typically need your attention include personal effects, wall hangings, and collections.

6. Add Color

Once you have de-cluttered and depersonalized, think about creating a lively atmosphere for prospective buyers. If you plan to repaint interior walls, stick with neutral hues that find mass appeal. You may also add color inside your house by using indoor plants as well as accessories such as pillows, cushions, rugs, and simple artwork.

7. Think Hard

Before you get on the path to improve your home’s appeal, pay due attention to these aspects.

• Your reason for making changes. Determine if you wish to sell your home for more money or simply make it ready for showing to prospective buyers. Seriously reconsider making major renovations as they might not result in the desired ROI. If you feel your home is in good condition, you might not have to do much.
• Your budget. Come up with a budget and then determine just what it allows you to do. Make a list of all the changes you would like to make and prioritize them based on your budget. Having a budget ensures that you keep your costs in check.
• The neighborhood’s style. The changes you undertake should ideally be in line with the general style of your neighborhood. For instance, if none of the homes in the vicinity have swimming pools, adding one in your home might limit the number of prospective buyers. This is because you would then price your home higher than the average price of otherwise comparable homes in the neighborhood. Something seemingly as trivial as having picket fences in a lane of houses filled with tall hedges might not work well either.
• Permissions. If you plan to make extensive or structural changes, you might need to get permissions from your homeowner’s association (HOA) and/or the local zoning board.

Conclusion

Given the lackluster supply and a significant rise in demand, the Spring of 2021 appears to be a great time for selling your home. However, getting it sale ready is crucial if you hope you get a good deal. Making sure your home is prepped in the right manner can help increase its appeal as well as value, although it’s important that you don’t go overboard with your spending.

With there being no major respite from the spread of COVID-19, it is safe to assume that many prospective buyers will choose to conduct virtual home tours. Therefore, it’s important that you give them this alternative.  Some buyers might be in a hurry to close deals, especially toward the end of spring. If you can provide flexibility in this respect, you may gain some concessions from the buyer’s side as well.

When the U.S. Government signed the Blue Water Navy Vietnam Veterans Act into law in 2019, the Department of Veteran Affairs (VA) lifted previously applicable lending caps. This ensures that eligible borrowers may apply for VA loans in all regions, irrespective of the loan amount. Depending on your circumstances, getting a no down payment VA loan might work well for you. However, it is best that you learn how these loans work before making a decision.

What Is a VA Loan?

While private lenders provide VA loans, they are backed by the Department of Veteran Affairs. This is its way of helping active duty service members, veterans, and survivors become homeowners.  Created in 1944 as part of the Servicemen’s Readjustment Act or the GI Bill of Rights, VA loans have been popular since.

Since VA loans are government-backed – meaning that the government will repay all or part of your loan in case you default or face foreclosure – they are relatively easier to attain when compared to conventional loans. VA loans require no down payment, but you need to pay a loan funding fee. According to recent data, the Department of Veteran Affairs backed over 1,246,000 home purchase and refinance loans in 2020.

Benefits of Getting a VA Loan

Getting a VA loan comes with various benefits.

• No down payment. Unlike conventional loans where you need to pay at least 20% as a down payment, you may get a VA loan without making any down payment. In 2018, over 75% of all VA-backed loans came with no down payments.
• No limit on the loan amount. While there is no limit on how much you may borrow through a VA loan, there is a limit to the liability that the VA takes. As of 2019, this stands at a maximum of 25% of the loan amount, minus the amount of the entitlement you’ve previously used.
• No PMI. When you don’t come up with the required 20% down payment for conventional loans, you are required to get private mortgage insurance (PMI). For a $200,000 loan, this can add over $160 to your monthly repayment. Since VA loans are government-backed, you don’t have to pay extra for PMI.
• No credit score requirement. The Department of Veteran Affairs does not require a minimum credit score to issue its Certificate of Eligibility (COE). However, most lenders still require that borrowers have credit scores of 620 and higher. Not having any credit history at all might also make lenders wary about lending to you.
• Not just for first-time buyers. As long as you successfully repay your VA loan, you may apply for another.
• No prepayment penalty. You don’t have to worry about additional charges or fines if you decide to pay our loan off ahead of schedule.
• Foreclosure assistance. In the unfortunate event that VA loan holders face potential foreclosure, they can get the Department’s loan specialists to negotiate with their lenders for better terms.

Are You Eligible for a VA Loan?

If you are on active duty or have served in the U.S. Military, you might qualify for a VA loan. The Department extends this benefit to members of the Army, Air Force, Navy, Coast Guard, Marine Corps, and National Guards. To apply for a VA loan, you need to get a Certificate of Eligibility from the VA. You are required to use the home you purchase as your primary residence.

Minimum Active Duty

Eligibility requires that you meet the minimum active-duty service requirement depending on when you served. For instance, if you are a veteran who served on active duty for 90 days during wartime, or over 180 consecutive days during peacetime, you are eligible to receive the COE. If you enlisted any time after September 7, 1980, you need to have served at least two years. It is also important that you have not been discharged dishonorably. National Guards needs to have served for at least six years to qualify.

Spouses

Surviving spouses of service members who were prisoners of war or went missing in action might qualify, provided they do not remarry. Spouses of veterans who passed away from service-related reasons while in active duty, and who remarried after December 16, 2003, or after turning 57 years old might also be eligible.

Foreclosure and Bankruptcy

Foreclosure and bankruptcy don’t have a long-lasting effect on your ability to get a VA loan. For instance, you may apply for a VA loan any time after two years from the date of a foreclosure or bankruptcy ruling.

Types of VA Loans

Depending on whether you qualify, you may get a VA loan to purchase a home or refinance an existing mortgage.

• Home purchase. You may qualify for a VA loan if you wish to purchase a house that will serve as your primary residence. Depending on the state in which you live, you might benefit by getting property tax reductions meant for military borrowers.
• You may consider refinancing your existing VA mortgage to bring down its interest rate. Alternatively, you may use the VA Interest Rate Reduction Refinancing Loan (IRRRL) to switch from an adjustable-rate mortgage to a fixed-rate mortgage.

Are There Any Drawbacks?

Getting a VA loan might seem great, but knowing just what might go wrong down the line is in your best interest.

• The zero down payment pitfall. Getting on the homeownership path without making a down payment might seem great. However, you need to account for the monthly repayments, as well as the extra interest you’ll end up paying throughout the course of the loan. Besides, if there’s a negative shift in the housing market, you might end up owing more than your house than it is actually worth. This means taking a financial hit if you wish to sell your home or having to wait for the market to revive again.
• Loan funding fees. While you don’t have to attain PMI, you still need to pay a VA loan funding fee, which may vary from 1.25% to 3.3% of the borrowed amount. If you get a $250,000 loan, this fee could be between $3,125 and $8,250. This fee is typically added to the value of the balance of the loan and increases your monthly repayment. In some cases, you might have to pay a loan origination fee charged by your lender.
• Not available for all property types. Getting a VA loan for new construction is possible, although building sites, plans, and builders need to be VA-approved. Approval requires three inspections, and builders need to provide at least one-year guarantees. Getting a VA loan for Co-Ops and vacant lands is not possible.
• Not for investment purposes. You cannot use proceeds from a VA loan to invest in real estate. You must use the home you purchase as your primary residence. Refinancing using a VA loan works in the same manner, meaning that you must live in the house that contains the mortgage you wish to refinance.

Steps Involved in Buying a Home Using a VA Loan

Buying a home using a VA loan requires that you follow various steps.

Determine Affordability

Create a budget after accounting for your household expenses in order to determine how much you can afford to pay toward your mortgage each month. If you think you’re falling short, establish if you can eliminate some non-essential items from your lifestyle. While creating a budget is not necessary, it gives you the means to make a well-informed decision.

Select a Lender

Compare different VA loan providers based upon parameters such as interest rates, fees, flexibility in terms, and customer service. Remember that the best mortgage provider might vary based on individual requirements. According to the Consumer Financial Protection Bureau (CFPB), not comparing mortgage providers can cost average homebuyers around $300 per year throughout the course of their loans.

Get Preapproval

Getting preapproved for your VA loan gives you a clear indication of how much your lender is willing to lend to you. It gives real estate agents and sellers an indication that you are serious about buying a home, and not just testing waters. Getting a preapproval might also work in your favor at the negotiation table, especially if you’re up against a buyer who does not have preapproval.

This step requires lenders to check your eligibility, determine your creditworthiness, and establish how much you may afford to borrow.

Find a Reliable Realtor

More often than not, home buyers do not have to pay real estate agents, as sellers are typically responsible for paying both agents’ commissions. While not all homebuyers employ the services of realtors, doing so might work in your favor.

Real estate agents tend to have local knowledge and can assist you with your search for the right home.  They can help you at the negotiation table and can guide you through all the paperwork that follows. They can also answer any questions you might have about the home buying process. Finding a good real estate agent can be simple, provided you know what questions to ask.

Narrow Down On a House

This step can be fun, although finding the right home might take some time depending on the area you wish to explore. Bear in mind that homeownership and repaying a mortgage is usually a long-drawn affair. This requires steering clear of homes that you feel you might wish to sell in a few years. It is best to highlight your requirements at the onset and then look for homes accordingly.

Opt for a Home Inspection

This step is optional. However, it makes sense to get a professional inspection if you plan to purchase an old home. A professional home inspector will identify all types of major and minor defects, safety issues, as well as other existing and potential problems. This step gives you an indication of how much you might need to spend to get the house in order again.

Bear in mind that an appraisal is not the same as an inspection, and it does not delve deep into a home’s condition. It is the responsibility of a VA lender to arrange for an appraisal, as this helps establish its fair market value.

Make Your Offer

Consider taking advice from your real estate agent when the time comes to make an offer. This is because your agent should have the experience and the knowledge to try and get the best possible outcome for you. Your agent can carry out a comparative market analysis to determine if the home’s asking price is over the top.

Your agent can also guide you in adding contingency clauses. For example, if you have not inspected the house yet, a contingency clause that hinges on a successful inspection can safeguard your interests. Other contingency clauses can make the contract of sale subject to the approval of your mortgage and/or the home’s independent appraisal.

Pay a Deposit

Homebuyers are usually required to pay deposits along with their offers. This tends to vary from 0.5% to 2% of the home’s selling price. Once you make a deposit, the buyer is required to take the home off the market. If you fail to go through with the purchase, you might have to forfeit the deposit amount partially or in totality, unless a contingency clause covers your reason for backing out of the deal.

Finalize Your Loan

Give your lender a signed copy of the purchase document. You might need to provide additional documentation during the underwriting stage. If approved, go through the closing disclosure carefully and sign the final paperwork. It can then take your lender up to a week to disburse the funds.

Conclusion

If you qualify for a VA loan, you may get on the path to homeownership without making a down payment. However, while getting a VA loan comes with various benefits, you need to take a look at possible downsides as well. If you are unsure about how well a VA loan might work for you, consider seeking assistance from a qualified professional.

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

While the United States Department of Veterans Affairs (VA) acts as a guarantor for these loans, it does not issue them. Instead, its sets the framework surrounding aspects such as eligibility and requirements under which lenders may offer VA loans.