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Lease-Option Contracts & Regulatory Limitations

So, you began renting your home a couple years ago, and now you’ve decided to exercise the purchase option of your lease-option (sometimes also referred to as a lease purchase or rent-to-own) agreement.  Simple, right?  Not always.

As the buyer, you will usually need a mortgage loan – and oftentimes, if you’ve been in a lease-option arrangement, there is at least an understanding between you and your landlord that some or all of your accrued rent will be applied to the purchase of the home.  There are a few ways that this can be handled, but it’s important to check with your lender to determine the best choice for you.

Many lenders face regulatory guidelines (some internal, some external) that either (1) limit the maximum amount of such a credit or (2) dictate how the accrued funds can be used toward the loan.  It is important to be aware of these regulations and guidelines as you negotiate your purchase contract so that you and your agent can factor in appropriate seller credits when crafting your offer and avoid overestimating what the seller can provide.  Consider these two scenarios:

  1. You and the seller/landlord agree to a sale price of $250,000.  You also agree that $300 of your monthly rent payment will accrue toward the sale price.  So, after two years of renting, you have accumulated $7,200.  Then, when you execute the purchase contract, the new sale price is $242,800 for the bank’s purposes.
  2. You and the seller/landlord agree to the same sale price and rate of accrual, but your lease-purchase agreement states that the accrued $7,200 will be used toward your down payment and the purchase price will remain at $250,000.

Scenario #2 can get sticky.  Since the seller has your funds, most lenders would view these funds coming back to the buyer as a “gift” – but gifts are not typically permitted from non-relatives.  The same funds, however, can be used toward closing costs (also known as seller-paid concessions).

Essentially, you can draft a lease-option agreement with your landlord that contains just about any terms that you wish.  But it’s essential to remember that the terms you agree on might not necessarily mesh with the guidelines that the lender will ultimately set forth.  Items such as the maximum allowable seller concession, the “Market Rent” as determined by an appraiser, any minimum down payments for the loan, etc. will all have to be factored in when deciding to exercise your option to purchase.

How a buyer takes full advantage of any accrued entitlement will vary from case to case, but it will almost always require careful negotiation with the seller and clear communication with both your real estate agent and mortgage loan officer.  A contract that applies too large an amount or percentage of accrued rent to the purchase may not survive underwriting. To overcome this, buyers and sellers must remain flexible and willing to (re-)negotiate certain fine points of the purchase contract in order to work around the regulatory obstacles and still reach the mutually beneficial result – the sale.  Always seek the assistance of your lender “before” entering into the lease-option agreement.

Note:  The three terms (lease-option, lease purchase, and rent-to-own) are often confused with one another.  There are distinctions.  A lease-option is generally for one or two years with an “option” to buy at the end of the term, but no obligation to buy.  In a lease purchase, you are renting for a time (six months is pretty typical – essentially you have early occupancy) and close on the purchase at the end of the term.  In other words, you entered into a purchase contract and agreed on the price at the beginning; your closing date is just pushed out further than usual while you “rent” or make use of extended early occupancy.  In a rent-to-own situation, the tenant pays extra rent that is held until enough money is accrued to make one of the first two options possible.  The differences among the three are subtle, but can be very important; thus the need to employ the assistance of both a Realtor® and your mortgage specialist in advance of entering into any of these agreements.  Also note that different states may have different rules regarding these options.

Low Interest Rate Doctor Loans

The other day, I received a call at the office from a gentleman who said that he anticipated completing his residency soon and relocating for his first staff position.  He specifically wanted to learn about our physician loan program and he asked flat-out whether we offer low interest doctor mortgage loans.  The way he asked the question is what merits discussion.  Do we offer mortgage loans at competitive rates?  Yes.  Do we have a special physician mortgage loan program designed to accommodate the unique financial circumstances of residents, fellows, and new doctors? Absolutely we do.  But, do doctor loan programs generally guarantee a low interest rate? That depends — compared to what?

It is not at all unusual for residents, fellows and new doctors to feel as though they have to put their home buying plans on hold while they save 20% for a down payment.  They typically have high levels of debt from student loans, but they anticipate high future income.  Physician loan programs address these circumstances by offering low- or no- down payment loans, generally with no monthly mortgage insurance premiums.

Doctor loan programs may additionally allow the 100% financing of a home at rates that mimic conventional loans but that would require a 20% down payment.  For a doctor who is just starting a career and carrying significant debt, the ability to finance a home’s entire purchase price can be a huge benefit.  Furthermore, doctors who authorize automatic, electronic monthly transactions to pay their mortgages may qualify for additional pricing incentives, such as a “credit to pricing” that nets a slightly lower interest rate.

Whether a particular physician qualifies for a “low interest rate” doctor mortgage loan, however, really depends on that individual’s credit score and other factors, including the following:

Prime Lending Rate – This is the rate set by the Federal Reserve; it establishes a baseline that lending institutions use to determine their actual or effective rates.

Credit Score – Typically, doctor loan products require certain minimum credit scores.  Merely meeting the minimum criteria for the loan does not guarantee the lowest possible interest rate.  Generally speaking, as with other loan products (such as conventional mortgages, VA loans, and adjustable rate mortgages), the higher one’s credit score is, the lower the effective interest rate on the loan will be.

Term of the Loan – Mortgages amortized over 15 years will offer lower rates than 30 year amortizations.  Additionally, you may consider an adjustable rate mortgage.  These can be ideal if you know you’ll only be holding the home for between 5 and 10 years.

Of course, there are other factors and everyone’s situation is unique.  For residents moving into an attending role, the date you begin your new contract may be a consideration.  Student loans coming out of deferment, the number of trade lines you have on your credit, how long your established credit history goes back, etc. can all be factors that may affect your ability to qualify.

So, do we offer low interest rate doctor loans?  Yes.  We offer competitive physician loans with underwriting, financing and repayment features that are specifically designed to accommodate doctors’ unique debt-to-income and cash flow circumstances.  How “low” that rate actually is – whether the doctors go through our office or another lender’s – will ultimately depend on outside factors (such as credit score) more than the loan product’s features.

(It is also worth noting in this context that interest rates alone are not the only factor to consider when selecting a lender and a loan product; see our comments about when it does – and doesn’t – make sense to ‘buy down’ interest rates at our previous blog entry here.)

To read more about the Doctor Loan Program, click here.

The doctor loan program is available to physicians in Alabama, Arkansas, Delaware, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington, D.C., West Virginia and some counties in New Jersey and Pennsylvania.

Ready to get preapproved for your physician mortgage loan? Complete the fields below and I’ll be in touch shortly to get you started.

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VA Home Loans for Active and Prior Service Military

Gone are the days of zero down payment loans — or are they?  Not if you’re on active duty, have served in the past, or have been a member of the Reserves (with six years of service)!  A VA home loan may offer you a great opportunity to purchase a home with no money down.  It’s also a great way to avoid monthly mortgage insurance (PMI) payments associated with FHA loans and conventional loans with less than a 20% down payment.  Interest rates remain competitive as well!

VA home loans are primarily crafted to assist active duty members and prior service personnel with low downpayment and no money down home purchases.  These VA loans and are intended for owner-occupants only.  For instance, a VA loan will not work for an investment property or a second home that will not be your primary residence.  However, if your circumstances change some years after purchasing a home using your initial entitlement, you may have enough entitlement remaining to use your VA benefits again.  We can assist you in obtaining your Certificate of Eligibility, which will clearly state the amount of entitlement you have remaining.  In some cases, you may be able to hold two VA home loans at the same time.

J. and I know first-hand the challenges that our military members, retirees, and Guard members face.  J. spent  11  years in the Coast Guard and my husband spent 10 years in the Army.  We’ve both used our own VA eligibility and appreciate the benefits our veterans can reap from it.  Call us today if you want to explore your options!

Consider Calling Richmond Virginia Home

Our local real estate market has been up and down over the last few months.  The government shutdown may have been responsible for our dip after having an upturn in 2013 from the previous year.  Richmond is a great place to live as it is centrally located with access to the beach, mountains, or D.C. in a matter of a couple of hours.  Large lakes are just an hour away for boating in addition to the James River which is right in town.  Medical facilities are abundant with a new emergency center located at West Creek in eastern Goochland just off of 288 between Patterson and Broad Streets.  There are many good restaurants to choose from including a couple of old favorites of mine:  Mamma Zu’s on Pine Street in the city and Patina Grill in the suburb of Short Pump. The Science Museum is a hit for children and adults as well.  The historic Landmark and Carpenter Theatres feature Broadway shows plus the Richmond Ballet, Richmond Symphony and Virginia Opera, perform annually in the Region.  With so much to offer Richmond is truly a great place to call home!

Jamie Younger is a Virginia Realtor with Virginia Properties, a Long & Foster Company. She is a regular contributor to this blog.

“Buying Down” Your Interest Rate – What That Means, and When It Makes Sense

What does it mean to “buy down” my interest rate?

Essentially, every rate has a price.  And, to be clear, origination fees are the same as points – both are up front charges that are expressed as a percent of the loan.  For instance, a 1% origination fee (or point) on a $460,000 mortgage would equal $4,600.  So, how does this correlate to your interest rate?  I’ll try to explain.

When a lender quotes you a 4.49% rate with zero points, what they’re really saying is that the cost of this rate is zero to you.  For instance, zero points could mean that there is actually an origination fee, but the associated discount for 4.49% is equal to it, thus washing it out.  A lower rate may in fact be available, but it will likely cost you more money in closing costs.  An available 4.30% may yield only -.421 in discount points.  So, in this case, you would still have the 1% origination fee, but only .421, or $1,473.50, would be discounted.  Rather than the entire $4,600 being washed away, this 4.30% rate is actually costing you $2,026.50.  Please reference the chart below* based on a loan amount of $460,000:

Rate

1% Origination

Discount

Cost to You

P&I Payment

4.30%

$3,500.00

-.421 or -$1,473.50

$2,026.50

$2,276.41

4.375%

$3,500.00

-.638 or $2,934.80

$1,665.20

$2,296.72

4.40%

$3,500.00

-.710 or $3,266.00

$1,334.00

$2,303.51

4.49%

$3,500.00

-1.00 or $4,600.00

$0

$2,328.03

4.60%

$3,500.00

-1.264 or $5,814.40

-$1,214.40

$2,358.17

4.625%

$3,500.00

-1.327 or $6,104.20

-$1,504.20

$2,365.05

4.70%

$3,500.00

-1.518 or $6,982.80

-$2,382.80

$2,385.74

 

Here you can clearly see the impact of a lower rate on your immediate out-of-pocket expenses (closing costs).  Note in the “cost to you” column, if the figure shows a negative sign prior to the dollar amount, then that is a credit to you and lessens monies you will be required to bring to the closing table.   The question you would need to consider is whether the expense up-front is worth it for the lower rate amortized over a 15 or 30 year fixed term.  In other words, is the short-term cost of “buying down” the interest rate worth it in the long run, and do you have sufficient funds available to “buy down” the rate while maintaining sufficient cash reserves (if applicable to your loan product)? If you only plan on keeping the home for a short period of time, you would need to look at an amortization table to determine where the “break even” point is.  If you plan to hold the home for a long time, it very well may be worth it to pay the money up-front and realize the benefit of a lower rate.

Be sure to ask your lender how your rate is being quoted to make sure it’s the best option for you!

*This chart is for simplified illustration purposes only. It is not necessarily representative of any particular lender’s complete fee structure nor does it fully represent any specific loan product. Numerous factors will determine the products, interest rates, and “buy down” options available to individual buyers; be sure to discuss your options with your Loan Officer!

Credit Tip: Avoid New Debt Before Closing

One of the questions we are sometimes asked is whether it’s okay to go ahead and start buying furniture and appliances now that the house is under contract and a closing date is scheduled.  Doing so can mean the death of an otherwise stress-free loan, so the answer is definitely NO!

Incurring new debt impacts your debt to income ratio (DTI), adds a credit inquiry to your credit file, and can ultimately cause delays if we have to order “credit supplements” for your file.  A supplement is ordered to add new trade lines to your credit report.

Also keep in mind that, until your loan is closed, the deal isn’t done.  Complications with appraisals, home inspections, and titling – just to name a few – can still arise.  The best course of action is patience. Once you’ve signed all the paperwork and you know the house is yours, then it’s time to make it home. In general, the safest course of action is to avoid incurring new debt before closing.

We are aware that unexpected situations may occur, but before you go out and open a new credit line, contact your loan officer first to see what type of impact it may have on your loan approval.

Need a Home Without Closing Delays? We Understand!

J. and I were recently talking about what separates us from our competitors. We talked about price, availability, product knowledge, reputation, etc. – all of the things that lenders most often talk about. But then we also got into a discussion about the benefits of closing on time.

I’m no stranger to moving, and neither is J. When my husband transitioned out of the military, our home sold in less than a week. We didn’t have a place to go. Two dogs, a bird, fish, a baby, my husband, and I crammed into a very small efficiency hotel for almost two months while we searched for a suitable new home. This was our choice, but this kind of inconvenience is a reality for many new homeowners whose purchase has taken a turn for the worst at the eleventh hour. To spare yourself this type of inconvenience and expense, it is important to avoid closing date delays.

There are lots of other considerations for times when a closing gets delayed, such as rate lock expirations, earnest money deposits or non-refundable deposits, childcare, school schedules, work schedules, scheduling movers, pets, children, per-diem costs, temporary housing arrangements, special needs, time lost at work … the list just goes on and on! A closing delay can therefore become more than a headache — it can become expensive!

Upon reflecting on our closings, we are absolutely proud to say that we very rarely encounter delays. J. and I exhaust every possible means and work tirelessly to ensure that our clients aren’t faced with these dilemmas. Because each purchase is different, there is no single ‘trick’ to avoiding closing delays other than frequent, candid, and accurate communication with your Loan Officer. A proactive Loan Officer can help you avoid closing delays by closely monitoring the progress of your loan application and following up with appropriate offices if there seems to be some problem that could prevent timely closing.

Moving into a new home, even under ideal circumstances, can be emotionally draining and physically exhausting. The best thing we can offer our clients is a proactive approach combined with a sincere understanding of the unique challenges each and every one of them faces. That’s what it’s all about.

Budgeting Tips: How To Negotiate

How to Negotiate
The answer is always “no”, unless you ask the question. Have you ever thought about how many opportunities you might be missing in life just by not asking the right questions? Sometimes if you ask the right question, many good things can result from it, including saving tons of money. In today’s blog post, we will talk about asking the right question of negotiating, basically, politely asking someone for a better deal. You might be nervous about the subject of “bargaining” and think there’s no place for it in today’s world, but you just might be surprised. For example, you can negotiate on many purchases, including a car, a home, even credit card or banking fees, or a computer. You never know until you ask, so don’t assume the ticket price is the end of the story.

Know Your Bottom Line

Before you can even start negotiating, you need to know your bottom line. What is really the minimum price you can afford to pay for this item? Whether it’s a car, a home, or even a computer. What’s your budget? You must know this number before you even walk into the store or dealership.

Know Your Product

If you’re knowledgeable about the product, that shows you’re serious and you’ve done your research. If it’s a car, know the features of the car. Know the normal asking price to get it brand new. Know the Kelly Blue Book Price. Know prices of other local dealers. If it’s a computer, know the brand and the specs. Know the prices you can get it for online. Know the reviews of what other people think about it. The more you know about the product, the more convincing you will sound when you try to explain the price it’s worth to you.

Explain Your Circumstances

Don’t complain. It’s not going to help if you walk into a store and say “I need a deal on this computer because I just lost my job. What can you do for me?” Instead explain a bit about your circumstances. “I just moved to the area and I need a new car to get to work.” or “I’m a college student and my computer just crashed.” Instead of spending too much time here, simply mention what’s going on. This shows you are human and can appeal to the human side of the person you’re negotiating with. They’re not all robots.

Name Your Price and Explain Why

Don’t just say, “I’d like a deal.” Say specifically what you’re looking (your bottom line) and be reasonable. Don’t ask for 50% off. Name your bottom line and how you reached that number. “I’d like to spend $450 or less on this computer, because that’s how much money I am getting to sell my old one, and it’s really important that I break even.” This shows you’re not just coming in wanting a free deal. You’ve done your research, have a plan, and really want this item if you can get someone to work with you.

If you follow these steps, you’re likely to get a bit of a lower ticket price on your item. That being said, it doesn’t always work. You’re not always going to be able to go to your favorite store/dealership and get something at the price you want. Do your research, be determined and persuasive, and give it your best. Following these tips on how to negotiate and you never know- you could save big, just because you asked.

Important Mortgage Terms to Know

important mortgage terms

If you’re navigating a mortgage for the first time, there’s probably a lot of jargon that you find confusing. What are closing costs? What is APR? Before you make these big financial decisions, it helps to know just what exactly you’re getting into. In today’s post, we will talk about important mortgage terms to know so you can be prepared to navigate the waters of mortgages with the knowledge of the correct terms. There are a lot of terms that come up during the process of a mortgage. While this post won’t address every term, it will address some of the more common ones. As always, if you have questions, we want to help, so give us a call!

APR: Annual Percentage Rate
This is like your interest rate, but also includes other fees throughout the year. It doesn’t list a monthly bill, because it doesn’t include the principal. Rather it just gives you an idea of what your interest cost will look like.

Agreement of Sale
Basically it’s a contract to buy a house.

Acceleration Clause
This allows the lender the ability to demand repayment of the loan if the borrower does something wrong, such as violating another clause.

Closing Costs
Houses are expensive. Not only for their ticket price, but also for other fees, such as closing costs. These are the costs associated with the actual selling/buying of a home. Don’t worry- you might not have to pay these all on your own. Sometimes the seller will help, too. According to Zillow, these closing costs typically make up between 2 to 5% of the home’s purchase price.

Fixed Rate and Adjustable Rate
Check out our blog post about Fixed or Adjustable Rate Mortgage to learn more about what these terms mean and how they apply to you.

Applications/Application Fees
Buying a house isn’t a simple process. Even if you find a house you like, you have to start with the application process. This will include filling out a form that gets everything going, including home appraisals and credit reports.

Appraisal
How much a property (home) is worth. There’s normally fees that go along with this appraisal process.

Delinquency
This refers to a payment that is more than 30 days late.

Initial Interest Rate
This is the rate at the start of your mortgage. Sometimes this is just a teaser, so it’s important to make sure that you know the full conditions.

Escrow
Basically a mortgage loan held by a third party, which takes effect when specific conditions have been met.

Balloon Mortgage
This is a kind of complicated term, but it basically means that for a short term (like 5 to 7 years), you have normal payments on a mortgage (like you would for a 30 year term mortgage), but then at the end of those 5 or 7 years, you have to pay the rest of the mortgage off in full.

So here’s a few terms to get you started, but this isn’t quite all you’ll need to know in order to get a mortgage. If you’re interested in learning more about the mortgage process, give us a call and we’ll be happy to answer questions and help you through the process!

Sources and More Info

10 Must Know Mortgage Terms
Discover’s Home Loans Glossary
Zillow- Closing Costs
Mortgage Professor