Home Buying

Everybody wants a deal. As they should, but don’t let getting a “good deal” prevent you from purchasing your dream home. Of course you have to feel comfortable with your payment and be able to afford the home, but I am referring to losing a home because you were out bid by a few thousand dollars or didn’t offer what the seller is asking for. This is even more important in a market where interest rates are on the rise. Paying more for a home today could actually have a lower monthly mortgage payment than a much less expensive home next month as rates continue to trend upward.

First things first. I’m not referring to a home that’s been sitting on the market for months. Bid whatever you want on that home and you’ll likely be able to find a fair compromise with the seller during the negotiation process. This article is geared towards people looking to buy that new listing that’s in a good location that is going to get multiple bids the weekend it hits the market. What’s the right amount to bid in a best-offer situation? Less than asking price? Asking price? Higher than asking price?

Talk to your lender and have him/her show you the difference in your monthly payment at various price points. Then talk to your realtor and have them pull sales comparisons to make sure your making an educated offer at a fair valuation. Then determine how bad you want the home and how long you see yourself living there. Because in a competitive market/location, it’s typical for values to rise. So you’ll likely feel better about making that strong offer when the return on your investment is much higher down the road.

You likely won’t overpay for a home. There are contract items that will prevent this from happening. For example, if you contract on a home at $420,000 but it appraises out for $400,000, you have an out. You also have ammo to go back and renegotiate with the seller. Appraisals are done by using recently sold homes comparable to the one you are purchasing, and there is a lot more data in these reports than there used to be. If the home doesn’t appraise out, you are protected by the language in your contract to cancel.

What’s the difference in payment? Assuming a 20% down payment on a home at $420,000 and $400,000, the difference is about $80/month. So do you love the home enough to pay an extra $80 per month? Is it worth losing the home for the cost of filling up your gas tank? Maybe, but most people home searching at that price point can afford the slightly higher payment. What people are forgetting to take into consideration are interest rates. People are so caught up on the dollar amount that what they fail to realize is that their monthly payment would have been lower at $420,000 today then at $400,000 next month if rates go up 0.5%. The longer you wait for the perfect home at your set purchase price, the higher your payment could go and lower your purchasing power becomes.

Are you somebody that has lost in a bidding war? Would you like me to show you a loan comparison for a specific property you are going to view this weekend? Call or message me today and I’m happy to provide you with a detailed loan comparison at multiple price points. Don’t get me wrong, price is important, but I encourage you to put more weight on payment than price.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

Whether you are purchasing or refinancing a home, we need to review bank statements. It’s important to know what we are looking for to prepare yourself for a smooth process.

In addition to assessing whether or not you’re able to regularly make your monthly mortgage payments, another role of mine is to make sure you have enough money for a down payment and closing costs. Part of how we do this is by reviewing your bank statements. However, we look a little deeper than just your account balance when approving or denying you for a home loan.

It’s important to make sure all your documents and records are sorted and straightforward before applying for a home loan.

Maintaining a “clean” bank statement

How many months

When applying for a loan, we will request two months bank statements. We will ask for all pages, including the junk pages. If your statement says “page 1 of 4”, then we will require all 4 of the pages. Online statements are acceptable but screenshots are not.

Multiple account holders

Is your bank account held jointly? Is there somebody listed on the account that is not on the loan you are applying for? If so, we’ll need a joint access letter from the other account holder stating that you (the person applying for the loan) has 100% access to all funds in the account.

Transfers from other accounts

The best thing you can do is limit the transfers. Any account you are transferring money from will have to be verified, especially if the transfers are large*. If you introduce another account, we’ll need two months of that statement. If you have large transfers into this new account, we’ll need to verify where those funds came from as well. The best thing you can do is limit the transfers over a 60 day period. *More on large deposits below.

Bank statement warning signs

Overdraft charges

Having a long list of overdraft charges in your account isn’t the best indicator that you’ll be a good borrower. No matter the circumstances, having a history of overdrafts or insufficient funds noted on your statement shows the lender that you might struggle at managing your finances. This isn’t always a deal breaker, but an underwriter may request a written explanation.

Large deposits

Another red flag to lenders is when a bank statement has irregular or lump-sum deposits. We need to make sure your funds are coming from an acceptable source. A large deposit is the sum of all deposits, not including payroll, which exceeds 50% of your gross monthly income. So if you earn $5,000/month, then the sum of your deposits must be less than $2,500, otherwise we’ll need to verify each of the deposits. Cash aka “mattress money” is not acceptable. Gifts and third party loans need to be explained, verified and documented appropriately. Unless you can provide acceptable documentation to paper-trail the large deposit, it’s likely we’ll disregard those funds, lowering your bank account total of acceptable funds for your down payment.

How to reduce bank statement scrutiny

Take extra care of your transactions for at least a few months before applying for a mortgage. Money that has been seasoned greater than two months will not show up in the account details of the statements we are verifying.

It’s best to start the process of organizing your bank activity and statements prior to applying for a loan. Start now. If that perfect home hits the market, you want to make sure your accounts are in order.

If you keep your bank statements top of mind in the initial search phases, you may have an easier time applying for a loan and ultimately securing it. Keep in mind that it’s best to maintain healthy finances throughout the closing process too. We will likely have to verify your earnest money deposit, so we may request additional bank statements prior to closing.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

You should be mindful of your credit profile throughout the entire process of purchasing a home.

Buying a home can be overwhelming for first-time buyers. Lenders will ask you many questions and have you provide documentation to support your application before granting you a loan. And of course, they will require a credit check.

I am often asked if we pull credit more than once. The answer is yes. Keep in mind that within a 45-day window, multiple credit checks from mortgage lenders only affects your credit rating as if it were a single pull. This is regulated by the Consumer Financial Protection Bureau – Read more here. Credit is pulled at least once at the beginning of the approval process, and then again just prior to closing. Sometimes it’s pulled in the middle if necessary, so it’s important that you be conscious of your credit and the things that may impact your scores and approvability throughout the entire process.

Initial credit check for pre-approval
The first thing I encourage any potential buyer to do is to get pre-approved. Many realtors may not even begin to show you homes until you’ve taken this first step. You can apply for pre-approval online, face-to-face or over the phone. Lenders want to know details such as history of your residence, employment and income, account balances, debt payments, confirmation of any foreclosures or bankruptcies in the last seven years and sourcing of a down payment. They will need your full legal name, date of birth and Social Security number as well so they can pull credit.

Once you find a home within budget and make an offer, additional or updated documentation may be required. Underwriters then analyze the risk of offering you a loan based on the information in your application, credit history and the property’s value.

Credit check during the loan process – maybe
Depending on how long it takes from your pre-approval until finding a home, contracting and then closing, a lot of time could pass. As determined by Fannie Mae guidelines, credit reports are only good for 120 days, so if you get pre-approved then find a home a few months later, your report may expire during the process and need to be re-pulled. Other reasons to re-pull might be to if you cleaned up some debt, removed disputes or had erroneous items removed that could impact your interest rate.

Final credit check before closing
Depending on how recent your initial credit report was pulled and how long your contracted closing date is, a lot of time can pass from the start of the process thru the date of your closing. Since your credit report is simply a snapshot of your credit profile, it’s understandable that things can change and new credit incidents may occur on your history. Lenders pull credit just prior to closing to verify you haven’t acquired any new credit card debts, car loans, etc. Also, if there are any new credit inquiries, we’ll need verify what new debt, if any, resulted from the inquiry. This can affect your debt-to-income ratio, which can also affect your loan eligibility.

This is known as a soft pull. We don’t actually generate new credit scores, and it will not show up as a hard pull on your credit record. If the final credit check results match the first, or if your debts have decreased, closing should occur on schedule. If the new report has increased debt, the lender may ask you to provide more documentation and send your application back through underwriting to make sure you still qualify.

It’s important for buyers to be aware that lenders run this final credit check before closing. If you ever need to open a new credit card or make a major purchase before your loan closes, be sure to contact your lender first to make sure the new debt doesn’t affect your approvability or your closing date.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

So you want to have work done to your house. Maybe you want a simple update, rehab your kitchen & bath, or maybe you want to put a full addition on the house. Where do you start and what program is best for you?

It starts with having to know a few things.

• Get a rough estimate in costs needed for the work (labor, materials, repairs, permits and architect/engineer if applicable). It’s a good idea to get a quote from a general contractor & architect up front.
• Speak to an agent to get an idea of what your home may be valued at once the work is completed.
• Know your current home loan balance.

Knowing the answers to these questions will help us determine your program options.

Construction Loans or Construction-to-Perm loans
These typically are used for big jobs, additions and knock down/rebuilds. These loans require a bit of equity and/or additional funds out of pocket. Construction loans may require 20%-30% equity in your future home value. For example, if you have a $300,000 loan on your home and the future value after construction is $500,000, a construction lender that will finance up to 80% means your total loan can’t exceed $400,000 (80% of $500,000). The construction loan will pay off your existing $300,000, leaving you $100,000 for the work to be completed. However, if the work costs $125,000, you will have to put the additional $25,000 into the project.

Construction loans are typically short term. They have higher than market interest rates and are typically variable rate loans. As your home is being built or renovated, the lender will pay the contractor directly after each interval or phase of the build is completed. This can require multiple inspections and title updates/fees.

Once the work is completed and/or you obtain a certificate of occupancy, you’ll want a permanent or fixed loan. This is usually done by refinancing yourself out of the construction loan and into a fixed rate mortgage.

If you don’t have that much equity in the home or the future appraised value (based on comparable home sales in the area prior to the build), you can expect to have quite a bit of skin in the game.

Cash Out loans
This is the easiest way to get financing but will require the most equity because the future value of the home is NOT taken into consideration. We will look at your current appraised value and can lend up to 80% of it. For example, your home is worth $300,000 but valued at $400,000. We can only lend to $320,000. So your existing loan gets paid off with the refinance and you are left with an additional $20,000 cash. This might be perfectly fine if you just want to do a small job, update your kitchen cabinets or a bathroom.

Unlike a construction loan, you are given the money directly. This is nice because if gives you the flexibility to do some work yourself and purchase items that normally wouldn’t be included in a construction quote i.e. furniture, home theater or the catering for your house warming party.

United Home Loans Mortgage Makeover & FHA 203k
These programs are perfect for those people that have very little equity in their home. It is very similar to a construction loan but caters to individuals that just don’t have the funds saved to do the work. You’ll still need a licensed contractor, a quote for labor, materials, repairs and permits, and the contractor gets paid in phases throughout the process. The lending is also based on the future value of the home, but unlike the construction loans these are FIXED RATE loans and they have loan limits. Typically these products are used for renovations but NOT major additions. Do you have 5%-10% equity in your house and need $20,000 – $50,000 for updates? This is likely the perfect product for you.

Home Equity Line Of Credit
Think of this as a credit card with a lien (mortgage) on your house. You only make a payment based on the loan balance. Payments are interest only and can adjust with the Prime Rate. Anytime you hear about the Fed raising or lowering rates, you’re rate will be affected. Lenders are becoming a bit more flexible with credit lines up to 90% or 95% of your home value, but variable high interest rates make this product less desirable. The upside of the line of credit is your ability to draw on it, pay it off, then draw again and again as long as you leave the equity line open.

Whether it’s a minor update or major facelift, there are programs designed for your situation. Call or message me to discuss which option best fits your needs.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

One of the most common questions I get asked as people begin their new home search is “what is the max purchase price that I can afford?”

My answer is always the same, “it depends.”

I get it. You want to know the cap so you are searching in the right price range, but there are many moving parts that will determine what you can afford and there are different lending guidelines depending on the loan product. Keep in mind that so many things impact your approvability, i.e. credit scores, down payment, occupancy, property type and whether you are salaried or self-employed. For the sake of this discussion, I’m keeping this strictly to affordability. So let’s dive in.

First and foremost, we look at your debt-to-income (DTI) ratio when qualifying. What is this and how is it calculated? Debt-to-income is the percentage of your gross monthly income that is allocated to all your monthly debts. We look at your monthly liabilities, including revolving credit card payments, student loans, car loans, etc., plus your new mortgage payment and divide that by your gross monthly income. We aim to keep this ratio of debts vs. income below 40%. For example, if you earn $10,000 a month, then your total monthly debt payments including the new mortgage should not exceed $4,000. So if you already have $1,500 in revolving monthly liabilities, then your new mortgage payment should not exceed $2,500. We work backwards from there to find the purchase price that would keep your payments around $2,500. However, we could never tell you exactly what the max home price you can afford is because the mortgage payment will be different depending on the property taxes of the home and/or association fees on various condos you may be interested in.

In the example above, I used 40% as the debt ratio we aim to keep you at or below. This gives us a buffer since most often we can actually go up to 45% and sometimes 50% with compensating factors like high down payment and excellent credit scores. Some government sponsored loans like FHA may even go higher but at a certain point you will become too much of a risk for the banks to lend. The entire profile of the loan is reviewed in order to make an underwriting decision, so there is no exact science to determining how much home you can afford. You’ll need to rely on the experience of your loan officer to help provide guidance.

Loan product can also impact how much home you can afford. The conforming loan limit is currently $453,100. Any loan amount over this is considered a jumbo loan, which has a different set of guidelines. Not only are debt-to-income ratios more strict on jumbo loans, but while somebody might be able to afford the monthly payment on a million dollar loan, they won’t find a program if they only have 5% down payment.

Payment SHOCK! Now that we’ve determined what you can qualify for on paper, you need to determine what you are comfortable with paying. There are various things we don’t account for in your debt ratio and you just might not be ready for the higher living expense. Maybe its day care or future private school tuition for you kids. Maybe it’s your lifestyle choices or hobby of collecting vintage wines. Or maybe… you were just living rent free with your parents and you’re about to take on a housing expense for the first time. Whatever it maybe, you may find yourself having “payment shock”, and regardless of what you may qualify for, at the end of the day it comes down to your level of comfort.

Give me a call for a free pre-approval. It’s important we have a discussion about your current and future goals as a homeowner so that I can help guide you towards the right price range that you don’t just qualify for, but you are comfortable with as well.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

While we continue to seek “normal”, the housing market has been a roller coaster ride of volatility. Whether you are a homeowner, renter, buyer or seller, here are some statistics that might interest you.

Renters
More Americans are renting today than in recent decades — some by choice and some simply due market conditions. Thirty-seven percent of American households are renters — about 43.7 million homes — which is an increase of 6.9 million homes since 2005. While part of the rise in renters is due to the 8 million homes lost to foreclosure during the recession, renters today also prize the maintenance-free and flexible lifestyle renting offers.

• Renters skew younger: The typical renter has a median age of 32 years old.
• Nearly half of renters are single, including a third who have never married.
• Although the majority of renters are single, 78 percent live with others, most often this is another family member.
• The median rent across the U.S. is $1,010 with highest rents in the West and lowest rents in the Midwest.
• Renting can be expensive: 79% of renters who moved in the past year had a rent increase.
• More than half of renters (57%) had a rent increase impact their decision to move and 37% of renters who aren’t moving say it’s because they can’t afford to.

Buyers
Buying is tough in all markets. For most Americans, it’s the biggest purchase they’ll ever make as well as a significant financial investment they’ll tap into as part of retirement. In particular cities, purchasing a home has become a competitive game, complete with bidding wars and offer negotiations. It makes sense that most buyers rely on agents to help them through the process.

• Today’s buyers have a median age of 40, although the majority (71%) of first-time buyers are Millennials.
• The median household income of the typical buyer is $87,500 and most buyers are married or partnered, relying on two incomes to purchase a home.
• The typical home in the U.S. purchased has 3 bedrooms, 2 1/2 bathrooms, measures 1,800 square feet and costs $200,000.
• Buyers take an average of 4.3 months to search for their new homes — although Millennials take just under four months (3.9 months).
• The suburbs rule: 49% of buyers buy there, followed by 31% of buyers buying in urban locations and just 19% of American buyers purchasing in rural regions.

Sellers
Although some hot markets have favorable conditions for sellers, selling is still rarely an easy process. Sellers have two main goals when they list their homes: one- to sell their home in their preferred time frame, and two, sell for their desired price. Balancing the two, timing and price, create a delicate dance and throw in the fact that most sellers are also buyers and searching for their new home, creates a often stressful experience.

• Sellers have a median age of 45 although Millennials make up nearly one-third of todays’ sellers.
• Sellers have a higher median income than homeowners at $87,500.
• The typical seller has lived in their home for 12 years.
• Most sellers are selling for the first time (61%) and looking to buy at the same time (71%).
• Seventy-six percent of sellers have to make at least one concession to sell their home — most often being a price reduction.
• One in two sellers sell their home for less than their original listing price.

Homeowners
As anyone will tell you, owning a home is a lot of work. It’s also a great investment, especially in many of today’s markets were annual appreciation rates are higher than they have been in decades. Beyond the work and the financial piece, home ownership often has an emotional component as well.

• Homeowners are the oldest, with a median age of 57 years and just 14% are Millennials.
• Homeowners have a median household income of $62,500 and 71% live with a spouse or partner.
• Forty percent of homeowners have a pet (with dogs ranking in top at 30%).
• Almost half of homeowners (46 percent) live in the first home they purchased, although this percentage decreases with age.
• Eighty-six percent of homeowners have no plan to sell in the next three years.
• Less than a quarter of homeowners say their home is in “like-new” condition and more than 60% say their home could use a little updating. The top of homeowners’ to-do list for the next year include: painting the interior (25%), improving the bathroom (22 percent) and landscaping (21 percent).

Which category do you fall in? Never hesitate to call, email or message me if you have questions.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

Statistic Source: Zillow

How important is it that you shop for the lowest interest rate? Sure, rate is important, but it means nothing if you work with a lender that can’t deliver on your loan, meet contracted closing dates or leave you feeling abandoned from lack of communication. Service is important, so you need to align yourself with the right lender that not only has competitive rates, but has good communication and a process that gives your loan the attention it deserves.

If you want to avoid homebuyer’s remorse, it will require a bit more than just choosing the right home in the right neighborhood. According to a recent survey by J.D. Power, 27% of new homeowners ultimately came to regret their choice of lender this past year. The major reasons for their dissatisfaction include: lack of proper communication, expectations not being met, and poor overall customer experience. Another reason many are unhappy with their lenders is due to pressure from those lenders to choose a particular product or loan. The best way to not feel pressured by a lender is to be prepared and to have certain criteria with several questions ready to ask them. You can eliminate some of the hassle of house-hunting by carefully filtering through potential lenders.

Here are 10 important questions to ask potential lenders before committing to one:

1. Are you a broker or a banker?
This is by far the least asked question I get. So what’s the difference? A mortgage broker is the middle man between you and the actual lender that services your loan. They give you advice and take the loan application but pass everything off to the lender for review. They don’t underwrite your loan in-house and they don’t fund your loan either. You can expect longer turn times as they have little control over the process. Will you meet your financing contingency date? Will you meet your contracted closing date? Will the loan funds make it to closing? Your guess is as good as mine.

A mortgage banker, similar to the broker, may not actually be the one that services your loan after you close. However, bankers have full control over the process. They can process, underwrite, prepare your closing documents and even fund your loan with their money. They tend to be more flexible as it pertains to exceptions and rush requests. You can expect a much smoother process, better service and shorter turn times than a broker.

2. What mortgage programs do you offer?
You don’t necessarily need to know about every single loan type possible but it’s important to know if they offer loans unique to your situation. A seasoned loan originator can help guide you towards the right product, but if you have a 580 FICO score, it’s good to ask if they have loan programs for people with lower credit scores. Are you looking to get a jumbo mortgage (loan greater than $453,100) and only have 5% down payment? These programs exist, but not all lenders offer these products. In most cases, choosing the best loan for your specific financial situation requires working with a lender who offers a wide array of loans. Remember, this is one of the largest investments you’ll make in a lifetime, so make sure you work with a lender that caters to your needs and doesn’t try to steer you into a program that simply doesn’t make sense for you.

3. What are the qualifications for the loan I’m seeking?
Here’s an example of a deal that I was recently asked to jump in and try to salvage. A military veteran was purchasing their first home using VA financing. This is probably one of the best products available, but depending on the property type, there could be roadblocks along the way. The original loan originator didn’t ask the right questions and drew up a pre-approval letter for a VA loan. The buyer contracted on a condo only to find out the condo project wasn’t already VA approved – A mandatory process for condos on government sponsored loans. Several weeks went by without progress, so I was asked to help. The seller was going to cancel the contract unless the buyer switched from a VA loan to conventional. We got the deal done, but all the stress, pressure and frustration amongst all parties could have been eliminated if the loan officer managed expectations day one. This first-time homebuyer isn’t expected to know these guidelines, but if the buyer understood the condo project had to already have been VA approved, then she would have either chose alternative financing or contracted a closing date much further out to give the lender time to get the condo project approved.

The point is, have a discussion with the loan officer about qualifying. Not just the credit profile of the buyer, but property type, location and any potential issues that could arise. Lending is tricky with over 1,400 pages of guidelines. All parties need to be on the same page, and you need to work with a lender that understands the qualifications for your particular loan.

4. What programs do you offer to first-time homebuyers?
Many first time homebuyers think there are specific programs out there JUST for them. They are right, but often times first-time homebuyers don’t actually need these programs. Some programs cater to those with little down payment, lower income and in some cases buyers can receive down payment assistance. With every Pro, there’s a Con. If you’re receiving a loan with low down payment, you can expect the PMI cost to be much higher. If you are getting a grant for down payment assistance, you can expect the interest rates to be much higher. First-time homebuyer or not, these programs may or may not be the right fit for you. However, it’s good to have a conversation about the products you are eligible for.

5. Can you give me an estimate of the rates and fees I can expect to pay?
While an initial estimate doesn’t guarantee your final, out-of-pocket expense, it can be a solid starting point for evaluating lenders. Rates fluctuate, so try comparing lenders on the same day to get the most accurate mortgage rate comparisons. Again, these rates won’t always be the same or 100% accurate, but they will give you an idea right off the bat of lenders to potentially pursue and lenders to avoid.

6. Can you quickly provide an in-depth pre-approval letter to my real estate agent?
If you are house-hunting in a hot real estate market, time is of the essence. Make sure the lender can quickly provide an in-depth preapproval letter to your real estate agent. You want a preapproval letter that makes the seller confident you qualify for the home and ideally, you want it to be delivered before competing offers arrive, giving you a better chance at the deal you want.

Most realtors actually want this letter before taking you out to show properties. You should make your loan originator your first point of contact in the home buying process.

7. What is your rate lock policy – Do you monitor mortgage backed securities?
Since a small change in rates can cost thousands in the long run, check to see the lenders mortgage rate lock options. Be sure to ask about the associated fees, including how much it costs to extend the lock should it expire before closing. You are going to need to lock your loan at some point, but typically the shorter the rate lock period, i.e. a 30 day lock versus a 60 day lock, has a better rate. If your closing date is in 35 days, is it best to do a 45 day lock or is it better to wait 5 days and do a 30 day lock? A mortgage professional who monitors mortgage backed securities can look at trends and understand if any upcoming financial news could impact the direction of interest rates. While nobody has a crystal ball, it’s best to work with a lender that has some understanding of mortgage bonds and recent trends to help provide you with an educated decision on the best time to lock.

8. Do you handle mortgage loan underwriting in-house?
This is an important question to ask. If the loan underwriting is completed in-house, loans can be processed quicker and questions answered more efficiently, and that means fewer potential complications or delays that could push back a closing date. Underwriting that takes place externally (brokered) can get very unorganized and become a terribly slow and painful process. These kinds of situations can sometimes cause a sale to fall apart due to lack of patience.

9. What is the estimated time for processing my home loan?
When you are coordinating the end of a current lease or timing a home sale with a new home purchase, knowing the estimated time it will take to process your loan is key. Of course, it’s always a good idea to build in a small buffer if you can, and not just because loan preparation can take longer than expected. Surprises sometimes pop up during the final walk-through before the home sells so it is a good idea to have a rough idea of how long it will take to process the loan before finalizing.

10. Can I expect communication in a straightforward and timely manner?
If your communication thus far hasn’t been efficient and helpful, that could be a bad sign of things to come. Find out if you’ll have a single contact who you can count on or just a general customer service line. Establishing a good working relationship with one person is usually the better move versus trying to deal with and explain things more than once to a handful of different people.

In Summary
Make sure to do your research and be prepared before entering these conversations. This is your money, your investment, and your life that is being affected, so do not be timid to speak up and help yourself. You will be thankful in the future for spending the extra time and effort to get yourself the better long-term deal.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

Putting your foot in the door of the real estate investment market can be both exciting and nerve-wracking. Like anything new, it will take time and research to get a handle on how things work to ultimately reach the goals you desire. But once you do get a grip on the learning curve, you will find that the results can be very rewarding.

Before you buy your first property, consider these five essential steps you’ll need to take.

Prepare For The Down Payment and Interest Rates
Financing the purchase of an investment property is much different than purchasing an owner-occupied home. As an investment, you want to maximize your balance sheet, so should try to put at least 20% down payment to eliminate the expense of Private Mortgage Insurance (PMI). The minimum down payment is 15% for a one-unit property, but PMI can be expensive. Multi-unit properties can require an higher down payment and lenders also require you to have reserves. So you need to be prepared and save.

Interest rates are different for investment properties as well. They are typically a bit higher, so make sure you consult with your lender for an accurate quote based on your specific scenario.

Decide If You Want To Rent or Flip The Property
It is important to know which method you intend on pursuing from the start: Renting or flipping the property. Renting and flipping an investment property require different strategies that you should know to be successful with your venture.

Flipping a home requires much more upfront cash and energy to buy, fix, and sell the home. If you are able to sell quickly, this route offers a faster profit. But beware, most mortgage lenders will request that you keep your loan for a minimum 6 months. Lenders lose any revenues earned for an early payoff, so for the super-quick flip, you may be best using an existing line of credit or cash for the home purchase.

Renting however, requires less expensive and fewer repairs, but it will take much longer to make your initial investment back. Rental properties require long-term commitments for maintenance and finding tenants, along with offering long-term, more static income.

Understand The Local Economy
Knowing the neighborhood and surroundings of the property can go a long way and be very beneficial to you. It is especially important to think long-term if you intend to rent an investment property. Is there a lot of room for growth and new employment, or does the area rely more on dying industries? Ideally, you want an economy that appeals to quality buyers and attracts potential tenants in your price range.

Research is always important and valuable to utilize, but nobody understands a city like a local. Between learning the ropes of renting or flipping a property and learning about a new area and their economy can be very overwhelming. This is why it is often recommended to start out by investing in a property near where you already live, or in an area that you know very well.

Research The Market
Once you have a building in mind, you’ll then want to take a look at similar properties in the area. Look through local listings to get an idea of the going rental rate or asking price for comparable properties. What’s the going rental rate? Will you cash flow positive as it compares to your mortgage payment? Is it worth a breakeven or negative cash flow if you feel the home value is going to improve?

Dig into the details to get a better look at the current market trends. Are rental properties listing lots of incentives or do they mention a waitlist when you call? If real estate agents and rental managers are eager to offer incentives, that often indicates a competitive market with too few renters. If you’re waitlisted or average prices seem higher than usual, it’s more likely to have potential lookers than there are available properties.

Factor In Repairs And Other Costs
The approach to considering if a property needs repairs depends on whether you intend to flip or rent the property. For either route, you will want to bring in a home inspector who can find problems that aren’t blatantly obvious to the average eye.

If you plan to flip, you will want to estimate the value of the after-repaired property and determine roughly how much the property could sell for after all the necessary renovations are made.
You will then want to look at repair costs. Factor in what you can do on your own, and repairs that will require professional labor. As you calculate the price of purchase and repairs, don’t forget to also include property taxes, closing and holding costs. Depending on how long it takes to sell, you could end up losing money on the flip if you don’t take these things into account.
If you plan to rent, it is best to avoid major, expensive repairs because renting is a long-term investment plan. Normally with long-term investments, you want to minimize your upfront costs.

Recap
Remember to keep these things in mind before purchasing an investment property: Be prepared to make the down payment and find out the accurate interest rates. Make the decision if you want to rent or flip the property before you get going. Understand the local economy and the area of the property you are investing in. Give yourself an advantage and research the market you will be working in. Lastly, factor in repairs and all other costs to allow yourself to earn a profit. Knowledge is power, the more you know about your surroundings, what you are doing, and why you are doing it, the better chance you have at achieving your goal, maximizing your balance sheet and making a profit. As always, feel free to call me with questions and to review your current ability to purchase an investment property.

Written By: Chris Ulrich – United Home Loans
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