Mortgage Loans – Some Tips & Terminology

Types of Loan

A conventional loan is provided by a bank, usually with a 10-30 year term providing a manageable monthly payment.

A private money loan is provided by a private investor, or a family member or friend.

Seller financing is when the buyer pays the monthly mortgage to the seller directly.  Usually the term is 3-5 years, amortized over 30 years — so the monthly mortgage amount is manageable like a conventional loan, but then the whole loan becomes due in 3-5 years, so the buyer has an incentive to refinance or sell before the whole loan (‘balloon payment’) is due in 3-5 years.

Mortgage Loan Amount

Typically a lender can offer a loan between two and three times your annual household income plus assets, assuming you are not saddled with too much debt (such as credit card debt with high monthly payments).

Fixed rate mortgages and adjustable rate mortgages

Fixed rate mortgages have an interest rate that remains unchanged for the term of the loan.

By contrast, adjustable rate mortgages change at certain intervals to reflect interest rates published from time-to-time through indexes floated by the money magicians.  That means that as this rate goes up or down, so will your mortgage payment.  Note also that caps are limits allowed in the interest rate and/or monthly payment on an adjustable rate mortgage.

If you have a convertible mortgage, then you can convert from an adjustable rate to a fixed rate, provided you are willing to pay an additional fee.

Credit Issues

If you’ve had previous credit problems, expect that you may need to explain the circumstances to your lender or broker. By keeping your debts paid-current for at least one year (following a credit problem), it does help improve your mortgage application.  Again, credit card debt is a real stain on an application.

Private Mortgage Insurance

If the buyer is not putting at least 20% down to purchase the house, then FDIC-insured loans have an extra cost called “Private Mortgage Insurance”.  The cost is basically just a monthly insurance fee.

Fannie Mae, Freddie Mac

These organizations are designed to guarantee the mortgage debt of private citizens, so that the government will bail out the lender if the loan is not repaid.  If you seek one of these loans and yet also complain about big banks being bailed out,  then I suppose you are being hypocritical. Modern history offers many examples of lending abuse between individuals, banks, and nations. It seems most people don’t even know that international financiers frequently fund both sides of the same war! For an in-depth analysis, I recommend the scholarship of G. Edward Griffin, and this documentary called Fiat Empire.

Amortization

This is just another word for mortgage interest. For example, if a loan is ‘amortized over a 30-year period at 4%’, then it means the interest rate is 4% over the course of 30-years.  Just plug these two figures into a mortgage calculator (google it) along with the loan amount and you can calculate your monthly mortgage amount.

Points

These are often charged by mortgage brokers as a kind of pre-paid interest on the mortgage. A point is equal to one percent of your total mortgage amount.  Points are prepaid because they are collected at closing (during the escrow).

Locking In

Your mortage broker can help you ‘lock in’ a loan, which means that the lender will guarantee the interest rate on your mortgage for a limited period, regardless of any interim change in market rates.  Sometimes you have to pay a fee for this lock-in guarantee.

The Appraisal

Appraisals take place about 5-20 days after a purchase contract is signed by the buyer and seller.  In a nutshell, an expert tours the home and looks at comparable property sales and then writes up a report for the lender that estimates the home’s value.  If the property is not appraised at or above the purchase price amount, the loan might not go through.  The consequences of this to the parties are specified in the purchase contract with regard to any ‘loan contingency’.

Escrow

An escrow refers to the company that helps receive and payout the funds between all the parties (buyer, seller, lenders).  They also help process lots of documentation (sale, recording, etc), taxes, HOA fees, and coordinate the title insurance.  Accordingly, it is really nice to have a helpful, personable, and diligent escrow officer working on your transaction.

Closing

The ‘closing’ refers to the process of finalizing the escrow so everyone gets paid and the deed is recorded and the buyer receives the keys.  Sometimes ‘closing’ also refers to the escrow process itself (usually in its final stages).

Settelement

This refers to the last stages of the escrow closing, when all the parties sign the necessary closing papers and legally transfer the property and all associated funds.

Closing Costs

I’ll plan to detail these more in another article, but in the meantime, closing costs are all the items that need to be paid in addition to the purchase price in or der to close escrow, such as: escrow fee, title insurance, prorated homeowner’s insurance, broker and lender fees, recording fees, notary fees,

Typically these add up to 1-2% of the purchase price.

Late Payments

Assuming the world does not spontaneously implode because of your unforgivable transgression… continued delinquency (late payment) or defaulting on mortgage (failing to make one or more payments) can lead to foreclosure, or judgment against you on the note for the amount owed.

Prepayment Penalty

Most mortages do not have a prepayment penalty, so there is no extra fee or interest charged if you decide to pay off the loan early.  In other words, without a prepayment penalty, there is no balloon payment on interest.

Lease Option

That if the price is right, a ‘rent to own’ option can be the best way to  secure the right to buy from a willing property owner, and still keep  your ‘options’ open. One way to look at the situation is that you are  paying the owner a premium rent for the option to purchase if you  choose.

Buying in 2012

If you don’t have enough money to buy right now, look on Craigslist for a “Lease with Option to  Purchase” (also called a “lease option” or “rent-to-own”).

In the present day, I generally don’t recommend buying a house in  the suburbs or city unless you need to live there.  If you can find organic rural homestead land  with water rights, do yourself a favor and buy it (or rent it) for your family and then farm it organically. Read the literal-based gospel too and search out who YHVH is.   My research suggests that we are experiencing the end of an age, so watch and prepare: www.LogicalHierarchy.com/Watch-for-Signs.pdf

Comparative Advantage of Buying And Selling Real Estate Without a Realtor

Selling real estate can actually be pretty straightforward, so it is routinely accomplished without a realtor simply by utilizing the services of a closing attorney or a FSBO Attorney, such as myself.  With that said, some folks (especially first time sellers) really do benefit from having a realtor help them appraise, market and show the property.  Realtors tend be very personable as well, and they are trained in providing step-by-step guidance and negotiations through the process. Indeed, real estate agents tend to advertise that they can negotiate a higher price (or lower price) for the property – and apparently that’s correct, as evidenced by data compiled by the National Association of Realtors. So this is not a blog for criticizing realtors in order to promote some cost-saving alternative of a FSBO attorney (i.e., thesis – antithesis).

Rather, this is a blog to highlight that if you are a confident and intelligent homeowner who is comfortable marketing and showing your own property, and you don’t mind spending $1k or $2k on a skilled FSBO attorney, then proceeding without a realtor might be an attractive option for you because: (a) saves you money, (b) promotes direct information and communication between the parties, and (c) promotes traditionalism. The same analysis applies to buyers who proceed without a realtor – most people know how to use the internet to find homes for sale, and a FSBO attorney can help you negotiate and document every step of the transaction.

So what I want buyers and sellers to understand is that they should independently determine what is right for their own needs in relation to their own skills… the correct answer depends on your circumstances.

1. FOUR WAYS TO SAVE MONEY WITH A FSBO
Here’s how FSBOs save money: (a) no real estate commissions, (b) reduced sales price means lower annual property taxes and transfer taxes at sale, (c) reduced sales price means reduced monthly mortgage and interest (this helps creditworthiness), and (d) reduces sales price means reduced closing costs.

a. Commissions

The typical 6% commission charged by two real estate agents is added to the total cost of the home.  Either the buyer pays this commission in the purchase price, or the seller pays this commission by taking a hit on his home sale profit. So by eliminating the commission from the price of the home, both parties stand to benefit.

b. Loan Amount

Lenders use the purchase price to set the ‘loan to value ratio’ that is key to determining the buyer’s eligibility to purchase the home. Therefore, purchasers without a realtor have a slight advantage in this sense – the less you borrow, the less interest you pay.

c. Closing Costs

The escrow fee and title insurance premium are typically determined in relation to the purchase price. So a lower purchase price reduces these closing costs.

d. Tax

There are also two key tax advantages to a FSBO in California: (a) tax assessors use the purchase price of the home to set the assessed value, so by lowering the purchase price, the buyer lowers the annual property tax, and (b) the closing cost item of city and county transfer taxes are set as a percentage of the purchase price, so by lowering the purchase price the buyer also lowers the transfer taxes.

Where a FSBO seller has priced his home at, or slightly below the market value of the home, the seller has anywhere from three to six percent “negotiating room” because a commission will not be paid on the transaction. Therefore, it can be in the seller’s best interest to sell FSBO to help the home sell faster (because the home is more competitively priced than those listed or sold by full priced real estate agencies), and because the seller can ultimately net more from the sale.

Consider the example of a $600,000 home. Assume full service realtor commissions are six percent, or $36,000. In this scenario, the seller will only net $564,000 from the sale; $600,000 – $36,000 = $564,000. If the seller decides to sell FSBO, the price of the home can be significantly lowered, let’s say to $580,000. The seller then benefits by $16,000, the difference between the $580,000 sales price and the $564,000 net proceeds if listed with a full service agent. The buyer benefits by $20,000 because the purchase price was $20,000 less. It is a win-win situation for both buyer and seller.
2. DIRECT INFORMATION

Without real estate agents, you deal directly with the buyer or seller. When communication is direct and informative, this can add confidence to the agreement.

3. TRADITIONALISM

There is also a traditionalism that may come with a home sale by the owner. Talk to your family members about their property buying history and you may find what I did: one of our family homes was sold on a handshake in Davis, California. A gentleman’s agreement was reached on the essential terms of the deal, and then everything was put down in writing later. In a way, it helps builds community.

Greg Glaser, Attorney at Law
San Francisco Bay Area – Northern California
(925) 642-6651
gregoryjglaser@earthlink.net
www.GregGlaser.com/FSBO.html
Flat Fee Packages Available