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Gift of Equity

Gift of Equity

 

There is a little-known mortgage program that could provide the vehicle for the right person to get into a home.  If a person sells their home to another for less than the fair market value, the difference in the appraised value and the sales price is considered a gift of equity for the buyer.

FHA requires that borrowers receive gifts of equity only from family members transferring title to the borrower. 

An appraisal is required to determine the value of the home.  The sales price is subtracted from the appraised value to determine the equity to be gifted.  If a home appraises for $300,000 when the owner will sell it for $250,000, the gift is $50,000.

The gift is applied to the down payment.  In this example, the borrower would have to qualify for a $250,000 mortgage which would require private mortgage insurance because a 20% down payment on a $300,000 home would be $60,000.  If the buyer had an additional $10,000 in cash to put down, the PMI would not be required, and the monthly payments would be lower.

The seller would need to provide a gift letter stating the amount of the gift, the date the gift, and that no repayment is expected or required.  It also needs to have the donor's name, address, phone, email and relationship to the buyer.  In addition, the settlement statement will need to show the gift being credited from the seller to the buyer.  The lender may require additional documentation.

Beginning in 2018, the annual gift tax exemption is increased to $15,000 per person per year and lifetime exemption to $5.6 million.  The fact that the $50,000 exceeds the individual amount doesn't mean there will necessarily be any gift tax due now.  The seller should consult their tax professional.

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    44 Times More Than a Renter

    44 Times More Than a Renter

     

    The Federal Reserve Board's Triennial Survey of Consumer Finances recently revealed the net worth of a homeowner was $231,400 compared to $5,200 for a renter.  The net worth of homeowners increased 15% from 2013 to 2016 while renters' decreased by 5%.

    Appreciation and principal reduction are the two dynamics that affect a homeowner's equity.  Each payment is applied to the interest for the previous month and the principal reduction to retire the mortgage.

    A $300,000 home purchased with a $294,566 FHA mortgage at 5% for 30 years has an average monthly principal reduction $362 in the first year. Two percent appreciation would benefit the buyer by $500 a month.  In this example, the equity grows by $860 a month for the homeowner.  A tenant would have to invest $660 a month over and above the rent they're paying.

    Based on the assumptions listed above, the $10,500 down payment would become approximately $85,000 of equity in seven years. Leverage and forced savings contribute to the difference in addition to the appreciation and principal reduction.

    The rent paid by tenants help the landlord recoup their investment in the home and a return on their investment. Some people say, regardless if a person rents or buys, they pay for the house they occupy.  The choice is whether to buy it for themselves or their landlord.

    Check out some of the benefits using your own numbers with this fill-in-the blank Rent vs. Own.

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      Do You Know the Way?

      Do You Know the Way?

      It may be natural for first-time buyers to be unsure of the process of buying a home because they haven't been through it before but even repeat buyers need to know changes that have taken place since the financial housing crisis.

      The steps in the home buying process are predictable and generally follow the same pattern.  It certainly makes the move stay on schedule when you know all the different things that must be done to get to the closing.

      • In the initial interview with your real estate professional, you share the things you want and need in a home, discuss available financing and learn how your agent can represent you in the transaction.
      • The pre-approval step is essential for anyone using a mortgage to purchase a home to assure that they're looking at the right price of homes and so they'll know what they can qualify for and what the interest will be.
      • Even with lower than normal inventory, it is difficult to stay up-to-date with the homes currently for sale and the new one just coming on the market.  Technology has simplified this process, but the buyer needs to implement them.
      • Showings can be accommodated online through virtual tours, drive-bys and finally, a personal tour through the home.  Your real estate professional can work with you to see all the homes in the market through REALTORS®, builders or for sale by owners.
      • When a home has been identified, an offer is written and negotiation over price, condition and terms takes place.
      • A contract is a fully negotiated, written agreement.
      • Escrow is opened to deposit the earnest money from the buyer as a sign they're acting in good faith.  The title search is also started so that clear title can be conveyed from the seller to the buyer and that the lender will have a valid lien on the property.
      • 88% of home sales involve a mortgage.  The lender will require an appraisal to be sure that the home can serve as partial collateral for the loan.  If the buyer has been pre-approved, the verifications will be updated to be certain that they're still valid.  The entire loan package when completed, is sent to underwriting for final approval.
      • When the contract is completed, at the same time the title search and mortgage approval is being worked on, the buyer will arrange for any inspections that were called for in the contract.
      • After all contingencies have been completed, the transaction goes to settlement where all of the necessary papers are signed, and the balance of the buyer's money is paid.  This is where title transfers from the seller to the buyer.
      • Possession occurs according to the sales contract.

      One of the responsibilities of your real estate professional is to make sure that things are done in a timely manner so that the transaction will close according to the agreement on time and without unforeseen or unnecessary problems.

      Even if you're not ready to buy or start looking yet, you need to be assembling your team of professionals.  Let us know and we'll send you our recommendations, so you can read about them on their websites.

      If you have any questions, call us at (941) 366-7673; we're happy to help.  Informed buyers lead to satisfied homeowners and that is better for everyone involved.

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        Roll the Repairs into the Mortgage

        Roll the Repairs into the Mortgage

         

        It's been said that if you can find a home that has most of what you want, you should go ahead and purchase it.  Many first-time buyers are using everything they have for a down payment and closing costs and would have to "live" with the less than perfect home until they can save the money to make the changes.

        The FHA 203(k) mortgage allows a borrower to purchase a home and provides additional funds for improvements to be made.  These types of renovations can include kitchen and bathroom remodels, flooring, plumbing, heating and air conditioning systems, additions and other things.

        The benefit to the buyer is that they have the opportunity to consider a home that needs repairs and might have been unacceptable without a program like this.  Being a FHA loan, a minimal down payment is required, fair interest rates and generous qualifying requirements.

        The 203(k) Streamline can be used for cosmetic improvements, appliances and minor remodeling up to $35,000 in cost.

        As you can imagine, this is a specialized program and not all lenders choose to make 203(k) loans.  They usually take longer to process and getting firm bids on the work to be done will be required.  It is important to find out how much experience a lender has with this particular type of loan.    

        It will also be required that you work with a 203(k) consultant in addition to the mortgage officer.

        For more information, go to Hud.gov.  FNMA has a similar conventional loan program called HomeStyle Mortgage.  Your real estate professional will be able to help with recommendations.  Call me at (941) 366-7673.

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          Getting the "Right" Home

          Getting the "Right" Home

           

          Finding the right home is still the biggest challenge buyers are faced with in today's market as is shown in the latest Confidence Index Survey.  Assuming the buyers find the "right" home with determination, perseverance and the help of a real estate professional, 88% of all transactions last year required financing to get the buyer's address on the home.  93% of first-time buyers needed financing.

          Pre-approval is an essential step that needs to be handled before buyers begin searching for a home.  The benefits to the buyer fall into the category of confidence.

          PRE-APPROVAL GIVES YOU CONFIDENCE

          • Knowing the amount you can borrow  
            the mortgage amount decreases as interest rates rise
          • Looking at the right priced homes
            price, size, amenities, location
          • Comparing and identifying the best loan
            rate, term, type
          • Uncover issues early that could affect the most favorable loan terms
            time to cure possible problems
          • Bargaining power to negotiate with the seller and possibly, competing buyers
            price, terms, & timing
          • Settlement can occur sooner after contact is accepted
            verifications have already been made

          Items Needed for Pre-Approval

          • Photo ID
          • Two months current pay stubs
          • Last two year's W2s
          • Complete copies of checking and savings statements for last three months
          • Copies of statements for IRAs, 401k, savings, CDs, money market funds, etc.
          • Employment history for last two years with addresses and contacts
          • Proof of commissioned or bonus income
          • Residency history for last two years with addresses and contacts
          • Assets for down payment, closing costs, and reserves; must provide paper trail
          • If self-employed, last two years tax returns, current profit and loss statement and balance sheet; copy of partnership/corporate tax returns for last two years if owning more than 25% of company
          • FHA requires driver's license and social security card
          • VA requires original certificate of eligibility and DD214
          • Other things may be required such as previous bankruptcy, divorce decree

          Contact us at (941) 366-7673 or Becky@RoseBay.com if you'd like a recommendation of a trusted mortgage professional.

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            Start Early and Live Happier

            Start Early and Live Happily Ever-after

            10/31/2018

            As storybooks go, the character is introduced, they meet their love interest, a villain thwarts their intentions, true love overcomes, they marry and live happily ever-after.  It's a very familiar formula.

            Similarly, there is a formula that couples follow in real life.  They go to college, get a good job, rent a home, fall in love, get married and buy a starter home.  They start a family, move into a larger home, save for their children's education, start planning for their retirement and if they live within their means, they invest their surplus funds.

            Financial Timeline.png

            An alternative to this might be to start investing in rental homes early in their adult life before their standard of living becomes so expensive that they don't feel like they have the money to purchase rentals.  There are infinite possibilities but let's say a single person, after getting a good job, buys a small three or four-bedroom home with an owner-occupied, minimum down payment.  They move into the home and possibly, rent out the bedrooms to other singles who need a place to live.

            At some point, they decide to buy another home to live in with a minimum down payment and either rent out their bedroom in the first home or rent the whole home to a tenant.  And they repeat the process again with the second home.

            This could continue until they acquired several homes.  Let's say, that in the meantime, they have met their love interest, decide to get married and together, they buy a starter home for them to live in.

            This concept advances the investment in rental homes from the latter part of their lives to the early part of their life.  The early investment gives them more time for appreciation and wealth accumulation.  A simple principle of investing is that sooner is better than later.  By delaying gratification to own your "dream home" early, a person may be able to accumulate more net worth in the same period of time.

            Buying a property initially as owner-occupied permits a lower down payment of 3.5% compared to a typical down payment for non-owner-occupied properties is 20%.  By using more borrowed funds, leverage can increase the yield on the investment.

            It may be too late for some people reading this article to adopt this strategy but if they have kids in college, it may be something for them to consider.

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              It's Not Just the Tax Benefits

              It's Not Just the Tax Benefits

              When the standard deduction for married couples filing jointly was increased from $12,700 to $24,000 for 2018, there was some speculation that the bloom was off the rose of homeownership.  The thought was that if the tax benefits from being able to deduct the property taxes and interest was less than the standard deduction, that maybe, the buyer would be better off continuing to rent.

              With mortgage rates as low as they have been for the past eight years, payments have been lower and so has the amount of interest that was paid.  This and the fact that sales and local taxes, which include property taxes, are limited to $10,000 a year on the Itemized Deduction form have made it harder to reach the increased standard deduction.

              The reality of the situation is tax benefits are only one of the components that make a home an excellent investment and it probably contributes the least of the top three benefits.  Principal reduction and appreciation build an owner's equity in an automatic way that is like a forced savings account.

              In today's market, it is common for the total house payment to be lower than the rent a first-time home buyer is currently paying.  As a homeowner, the buyer would have additional expenses like maintenance and possibly, a HOA. 

              To illustrate the net effect, let's look at a purchase price of $275,000 with 3.5% down payment on a 4.75% 30-year FHA loan.  We'll assume the home appreciates at 3% annually and the buyer is currently paying $2,000 a month rent.

              newsletter 102218.png

              The total payment is $2,115.44 including principal, interest, property taxes, property and mortgage insurance. However, when you consider the monthly principal reduction, appreciation, maintenance and HOA, the net cost of housing is $1,205.72. It costs $794.28 more a month to rent than to own. In a year's time, it would cost $9,531.36 more to rent than to own which is more than the down payment required to buy the home.

              In seven-years, the $9,625 down payment would grow to over $101,000 in equity.  The equity build-up far exceeds the tax benefits which some people would have as an additional incentive.  Use this Rent vs. Own to see what the net cost of housing would be using a home in your price range or call me at (941) 366-7673 and I'll do it for you.

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                Quick Plumbing Inspection

                Quick Plumbing Inspection

                 

                No one wants to waste water or money.  For that reason, take a few minutes every other month to do the following inspections:

                1. Check to see if cutoff valves on sinks and toilets are working properly. 

                  Many times, builders will put individual cutoffs on supply lines to sinks and toilets.  It is reasonable to expect them to work but after some time, they can corrode which prevents opening and closing.  It is a good idea to test them occasionally before you need them in an emergency.
                   
                2.  Fill each sink with a few inches of water to see if they drain in what you feel is a normal time.

                  A slow-draining sink can be an indication of a clog that builds up around the insides of the pipe.  Common causes are food, grease, hair and soap scum.  Plunging can take care of some slow-running sinks.  After partially filling the sink with water, seal the plunger over the drain and pump it up and down a few times.
                   
                3.   Inspect each toilet to see if they are leaking water from the tank into the bowl.

                  Toilets that continue to run after being flushed can use a large amount of water in a month's time.  Generally, the problem comes from a flapper that doesn't seat properly.  Sometimes, the chain is keeping it from closing properly or the flapper itself may need to be replaced.

                  Another issue could be that the flush valve needs to be replaced.  These can be purchased at Lowe's or Home Depot for about $20.00 and are relatively easy to change out.  There are lots of instructional videos on the internet and it can save money if you give it a try.

                If you need a recommendation for a good plumber to take care of something you discover, please feel free to call me at (941) 518-4432.

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                  Act Decisively

                  Act Decisively

                   

                  Whether it is hesitation or procrastination due to uncertainty, it can cost buyers by having to pay more for both the house and the financing.  This is one of those markets where most of the experts expect interest rates and prices will continue to rise through 2019.

                  The National Association of REALTORS® reports there is currently a 4.2-month supply of homes for sale which is close to the same as last year's inventory.  Normal inventory is considered to be a 6-month supply.

                  If during the period you're waiting to buy, the price of the home goes up by 5% and the mortgage rate increases by 1%, the payment on a $275,000 home with a 95% mortgage could be $233.80 more each and every month.  Over a seven-year period, the delay to purchase would total close to $20,000.

                  To act decisively, you need good information; a confused mind will not generally make a decision.  In today's market, you need to know exactly what price home you can qualify for and you need to know what kind of home you can expect for that price. 

                  You'll want a housing and a mortgage professional you can trust to give you the information you need to make good decisions for yourself and your family.  We'd like to be your real estate professional and can recommend a trusted mortgage professional.

                  To get a better idea about what it may cost you for a home in your price range, use the Cost of Waiting to Buy calculator.  If you have any questions, call me at (941) 366-7673.

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                    Fast Track Rental Property

                    Fast Track Rental Property

                     

                    FHA allows owner-occupants to purchase up to a four-unit property with a minimum 3.5% down payment.  The rent collected on three units could be used to make the payment and the owners' pro-rata share would be less than ¼ of the payment itself.

                    The owner-occupied unit would be considered their principal residence.  The other three units are treated as rental property and eligible for cost recovery, a non-cash deduction plus all the normal business expenses.  The rental income of the three remaining units is calculated as income and assists the buyer in qualifying.

                    A homeowner could buy a four-unit, live in one for two years, buy another four-unit with a minimum down payment, move into one unit, rent the other three as well as the previous unit in the first property.  Then, after another two years, repeat the same process over again.

                    The fifth year, the homeowner/investor would have a total of 11 rental units plus the one that they are occupying.  An acquisition strategy like this might be difficult for a family with children and a single person or couple might find it easier to move more frequently.

                    As the equity increases in these properties, due to appreciation and amortization, the money could be pulled out through refinancing to purchase additional income properties.  Another objective might be to pay the mortgage off as soon as possible and any cash flow after tax could be applied directly to the principal.

                    FHA has a nationwide mortgage limit for a four-unit of $521,250 but some high-cost areas have been designated with increased limits.  There are also loan programs for two and three-unit properties with limits of $347,000 and $419,425 with similar exceptions for high-cost areas.

                    The low mortgage rate and minimal down payments for owner-occupied FHA mortgages makes this strategy attractive because it gives investors an opportunity to highly leverage their investment.  Most non-owner-occupied (investor) mortgages would require 20-25% down payment and have a slightly higher interest rate than for an owner-occupant.

                    To learn more about this opportunity, call (941) 366-7673 and we can give you information on specifics in a variety of areas.

                     

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