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Archives for November 2019

How much work history do you need to buy a home?

November 19, 2019 by chorton Leave a Comment

How much work history do you need to buy a home?

Image result for did you know? even if you previously owned a home you still qualify for first time home buyer

When you apply for a mortgage, the lender wants to know that you can and will repay your loan. Your credit rating represents your willingness to repay. Your income represents the ability to repay.

This is why employment plays such a large role in the mortgage application process.

Underwriters check out the jobs you’ve had in the past, the job(s) you hold today, and the job you may hold in the future. They want to make sure you have a plan for your career — and that your plan is working.

Remember that, in general, a first-time home buyer lacks the employment depth of an experienced home buyer. A first-time home buyer may be fresh out of college or graduate school or could be just a year or two into his or her career.

The two-year rule

It’s typical for lenders to consider your last two years of employment. That does not mean you must have been conventionally-employed during those last two years.

Of course, there are the really easy cases.

For example, if you were a staff accountant in the software industry, and changed jobs to be a staff accountant in the medical field, that would be considered an acceptable lateral move by a lender.

Then, there are the unconventional but acceptable histories.

Suppose that you spent the last four years completing an accounting degree, and worked a couple of temporary accounting jobs during the summer. Upon graduation, you got a full-time accounting position.

The fact that you’d only been working full-time for a year probably won’t hurt your mortgage approval chances.

However, a ten-year employment history won’t help if you spent a year as an accountant, switched to bartending for a couple of years, and then started up a multi-level marketing gig. Now, you’re a personal trainer with six months in the business, and that’s just not a reliable track record.

In general, your lender just wants to make sure that your household income is stable, and will be ongoing for a period of at least three years.

How long must you be on the job to qualify for a mortgage?

As with many things in mortgage lending, the answer is “it depends.”

For instance, there are different requirements for conventional (like Fannie Mae) and government-backed loans (like FHA).

In fact, your work history might make you decide to change loan types. For instance, getting an FHA loan with less than two years employment is easier than qualifying for another loan type.

Following is a breakdown of what each loan type requires.

Loan TypeEmployment Length Required
ConventionalTwo years of related work or educational history
FHATwo years of related history. Need to be at current job 6 months if applicant has employment gaps
VA loansTwo years or relevant schooling or military service. If active military, must be more than 12 months from release date
USDANo minimum in current position; prove 2 years’ work or related history

Conventional loans with less than two years employment

Two years of employment history is recommended, according to Fannie Mae, the lead conforming loan rule-making agency. (Freddie Mac, the other mortgage rule-setter, has very similar guidelines.)

However, it also says that less than two years is acceptable, provided the applicant’s profile demonstrates “positive factors” to compensate for shorter income history.

What are these factors? Education is a great one. For instance, you have a four-year degree in the field in which you now work. That education almost always counts as work history. New grads typically have no problems qualifying despite a brand-new job.

If you recently changed jobs and changed fields, try to tie them together with a great letter of explanation. Present a case why this new job is just a continuation of your previous one. What skills did you build there that you now are using?

Keep in mind that the above only applies to salaried, full-time work. You’ll likely need at least two years of reliable income if you mainly earn bonuses, overtime, commission or self-employment income. And if you take on a second, part-time job for extra earning, you’ll need a two-year history for lenders to consider it.

FHA loans with less than two years of employment

FHA is more lenient about work history. Its guidelines state that previous history in the current position is not required. However, the lender must document two years of previous employment, schooling, or military service, and explain any gaps.

If an extended gap is present, the applicant must be employed in the current job for six months, plus show a two-year work history prior to the gap.

The FHA lender examines the probability of continued employment. That means verifying past work or education history.

FHA lenders want to see that you are qualified for your current position and that you are likely to remain in that position or a better one in the future.

Don’t worry if you have changed jobs frequently in the past two years. This is acceptable as long as each job change was an advance in your career.

Write a letter explaining how each move benefitted your situation — more money, more responsibilities, a company with more opportunity.

As with other loan types, FHA requires two years of documented history of overtime, bonus, and other variable income.

VA loan employment history requirements

VA loans allow you to qualify with less than two years of employment. The lender documents your work history and requests proof of relevant schooling or military service

These loans are tougher if you have less than 12 months of employment total (including all jobs). The VA lender may request the probability of continued employment from your current employer.

Additionally, lenders examine past training or relevant experience. The VA requires that the lender prove that an applicant has the needed skills for the current job.

For active military servicemembers, VA lenders consider income stable if the applicant is further than 12 months from his or her release date.

USDA loan qualification with less than two years of employment

USDA mortgages offer many benefits, such as zero down payment requirement and credit score flexibility. And they are also very lenient about employment history.

According to guidelines, there is no minimum length of time applicants must work in their current position before applying for the mortgage.

The applicant must document work history for the previous two years. It’s okay if he or she has moved around between jobs. However, the applicant must explain any significant gaps or changes.

If you are a USDA applicant, you must document that you were working toward or obtained a degree via college transcripts during the gap. Or prove your military service with discharge papers.

Both of these factors help satisfy your work history requirement.

While you can qualify for a USDA loan with a new job, you must prove that your current position is stable, so that you can make your mortgage payment long-term.

How much income do you need to get a mortgage approved?

To get mortgage-approved as a first-time home buyer, it’s not just your job that matters — your income matters, too.

However, the methods most mortgage lenders use to calculate income can put first-time borrowers at a disadvantage.  This is because first-time home buyers don’t often have the work history that an experienced buyer possesses. As a result, not all income may be counted as “qualifying” income.

Check out the common scenarios below. If you have questions about how your particular income would fit into the loan approval process, be sure to ask your lender.

Type of incomeYears history required
SalaryCan use full amount immediately, with offer letter or first pay stub
BonusTwo years’ history required
CommissionTwo years’ history required if more than 25% of income
OvertimeLender will average two years’ OT earnings
Hourly Preferably, two years’ average will be used if hours fluctuate
2nd jobTwo years’ history of working both jobs simultaneously

When you earn an annual salary

When your income is an annual salary, your lender divides your annual gross (before tax) income by 12 months to determine your monthly income.

In general, you do not need to show a two-year history — especially for jobs which require specific training or background.

When you earn an annual salary, plus a bonus

When you bring home an annual salary plus a bonus, your lender calculates your income in two parts.

First, your lender divides your annual salary by 12 months to determine your monthly income.


In short:

  • Salary: Lender considers your full, current annual salary
  • Bonus: The lender averages your actual last two years’ bonus income

If you have received bonus income for at least two years, and the employer indicates that bonus income will continue, lenders can consider it “qualifying” income.

Underwriters normally divide your last two years of bonus income by 24 months to arrive at a monthly total.

However, as with any income, if lenders see that it has been dropping year-over-year, they may choose to discount or even ignore this income.

When you earn an hourly income

Typically, lenders multiply your hourly rate by the average hours you work. The table below shows Fannie Mae’s guide to income calculations.

How Often PaidHow to Determine Monthly Income
AnnuallyAnnual gross pay / 12 months
MonthlyUse monthly gross payment amount
Twice MonthlyTwice monthly gross pay x 2 pay periods
BiweeklyBiweekly pay x 26 pay periods / 12 months
WeeklyWeekly pay x 52 pay periods / 12 months
HourlyHourly pay x average number of hours per week x 52 weeks / 12 months

Erratic work hours or recent job changes ca harm your income calculation.

Those with little work experience, who also earn hourly wages can experience difficulty when applying for their first mortgage.

When you earn overtime pay

When you earn wages plus overtime pay, your lender totals your prior two years of overtime pay and divides by 24. That’s your qualifying overtime pay.

Again, if the extra pay declines over time, the lender may discount it. And without a two-year history of overtime pay, your lender will probably not allow you to claim it on your mortgage application.

When you earn commission income (25 percent or more)

When you earn at least 25 percent of your income from commissions, your base income is the monthly average of your last 24 months of income.

If you have less than 24 months of commissioned income, your lender probably can’t use it for qualifying.

There are exceptions. For instance, if you work for the same company, doing the same job, and earning the same or better income, a change in your pay structure from salary to fully or partially commissioned might not hurt you.

You have to make the argument, however, and get your employer to confirm this.

When you are self-employed

When you are self-employed, mortgage lenders require at least two years of verified income. They then use a complicated form to determine your “qualifying” income. But understand that your gross revenues (before deductions) is not the figure that lenders use when calculating your qualifying income.

Lenders have been known to make exceptions on this rule — specifically, for recently self-employed persons who have started a business in a “related field.”

It’s not uncommon today for employees to continue working for the same company, switching to “consultant” status, which is self-employment, but getting the same or more income. These applicants can probably skirt the two-year rule.

What are today’s mortgage rates?

When you’re buying a home for the first time, you may not have the work experience of a seasoned borrower, but that doesn’t have to affect your ability to get mortgage loan approved.

Get today’s live mortgage rates now. You don’t need to provide your social security number to get started, and all quotes come with access to your live mortgage credit scores.

 

 

Filed Under: Blog, Buying a home, Real Estate Advice Tagged With: advice, real estate advice, work history

Are You A First-Time Home Buyer? Be Aware Of These Mortgage Programs

November 19, 2019 by chorton Leave a Comment

Are You A First-Time Home Buyer? Be Aware Of These Mortgage Programs

Image result for did you know? even if you previously owned a home you still qualify for first time home buyer

If you are shopping for a mortgage, you have probably seen all sorts of offers and advertisements aimed at first-time home buyers and wondered if these are really as good as they sound. In some cases, “first-time” programs are little more than attention-getting marketing messages from lenders, while in others they are actual assistance programs for people who may otherwise face challenges qualifying for a home mortgage or finding a home loan at an affordable interest rate. With this in mind, it is important to understand the difference between mortgage lender marketing programs, actual loan programs, and financial assistance programs.

You can be a first-time home buyer more than once

First of all, even if you have previously owned a home, you (or your spouse) may still qualify as a first-time home buyer. According to the U.S. Department of Housing and Urban Development, first-time home buyer status is not limited to people who have never owned a home before (although that criterion obviously applies). For lending purposes, a first-time home buyer includes anyone who fits one or more of these conditions:

  • An individual or a spouse who has not owned a primary residence for at least three years. This means married couples may qualify as first-time buyers even if only one of them meets this test.
  • A single parent who previously only owned a home with a spouse while they were married.
  • Someone who has only owned a primary residence that was not attached to a permanent foundation (e.g., a mobile home) in accordance with applicable regulations.
  • Displaced homemakers whose only previous ownership was with a spouse.
  • Someone who only owned property that was not in compliance with local building code ordinances and which cannot be improved to meet building code standards for less than the cost of constructing a new residence.

Types of programs

First-time home buyer programs can be broadly categorized as either loan programs or financial assistance programs. Both types of programs can be helpful to first-time home buyers. Loan programs, such as those backed by the Federal Housing Administration (FHA), are available to all borrowers through various commercial lenders, but they have features that may be particularly attractive to first-time buyers with lower credit scores or little in the way of cash savings. Private lenders may also offer attractive loan rates and terms for first-time home buyers with good credit and the ability to make larger down payments on a home purchase. Financial support programs for home buyers typically come from state and local government entities, although the federal government sometimes steps in to provide additional assistance during difficult economic times.

Loan programs

Mortgage loans are made by commercial lenders, such as banks, credit unions, or mortgage companies. These loans may be guaranteed by various organizations, to protect lenders against borrower defaults and also to make loans more affordable for borrowers.

  • FHA. The Federal Housing Administration does not make loans, although they do insure loans made by commercial lenders to protect lenders if borrowers default on loan payments. FHA loans are available to all qualified buyers, and they can be particularly attractive to first-time home buyers because the qualifications are easier. For example, a potential home buyer with a credit score of at least 580 may qualify for an FHA loan with as little as 3.5% of the purchase price for a down payment. Lower credit scores between 500 and 579 may also qualify with a larger down payment of 10%, though the interest rate on the mortgage loan will be higher.
  • VA. The Veteran’s Administration (VA) also guarantees portions of home loans provided by private banks or mortgage companies to active duty service members, veterans, and eligible surviving spouses. A home purchase loan guaranteed by the VA can help military vets and spouses purchase homes at competitive interest rates without the need to also make a down payment or purchase private mortgage insurance. Applicants must have satisfactory credit scores, along with sufficient income to meet expected monthly loan payments.
  • USDA Single Family Housing Guaranteed Loan Program. Similar to loan programs provided by FHA and VA, the United States Department of Agriculture (USDA) also provides loan guarantees to mortgage lenders so they can help borrowers with low and moderate incomes purchase homes in rural areas. The USDA program guarantees 90% of mortgage loan amounts for approved lenders to help offset the risk of offering 100% loans to eligible rural home buyers.
  • Freddie Mac Home Possible® Mortgages. The Federal Home Loan Mortgage Corporation (also known as “Freddie Mac”) makes it possible for lenders to offer home loans to buyers with down payments as small as 3% through the Home Possible® Although this program is not limited to first-time home buyers, first-timers must first participate in a borrower education program.

Home Buying Financial Assistance

Financial assistance programs exist across all levels of government: city, state, and federal. These programs may provide assistance with funds for down payments, closing costs, or other expenses tied to the home purchase process.

  • Fannie Mae’s HomePath Ready Buyer Program. In 2015 the Federal National Mortgage Association (FNMA or “Fannie Mae”) launched the HomePath Ready Buyer program, which provides first-time home buyers up to 3% of the home’s purchase price in the form of a rebate to assist with closing costs. Participants must complete an online home buyer education course in order to receive the 3% rebate.
  • State-by-state home buyer programs. Many individual states sponsor a variety of home buyer programs designed to help first-time home buyers and others qualify for home mortgages. Visit your state’s housing website to find details for your area. For example, first-time home buyers with low or moderate incomes are eligible for the Texas Mortgage Credit Certificate Program as a way to convert mortgage interest into a federal income tax credit. New York state home buyers can take advantage of the Conventional Plus Program for down-payment assistance up to 3% of the home’s purchase price.
  • City & county home buyer programs. Individual cities and municipalities can also offer assistance with home financing. For example, Miami/Dade County in Florida makes home financing assistance available to first-time home buyers through a loan program facilitated between Miami-Dade County Public Housing and Community Development and local mortgage lenders. Similarly, the Mayor’s Office of Housing and Community Development in San Francisco provides loan assistance programs for first-time home buyers. Consult with your city or county government offices for availability of similar programs.

As you review and evaluate the financial assistance or loan programs that may be a good fit for you, it is also a good idea to take inventory of your personal financial situation, such as checking your credit report (www.annualcreditreport.com), paying off credit cards and personal loans, and stashing more cash into your emergency fund. These tips and more are also available in this article: 5 Steps to Buying a Home.

Filed Under: Blog, Investing, Real Estate Advice Tagged With: advice, mortgage, mortgage programs, mortgages, real estate advice, tips

12 Low Down Payment Mortgages, Including Some With Low Or No Mortgage Insurance

November 19, 2019 by chorton Leave a Comment

12 Low Down Payment Mortgages, Including Some With Low Or No Mortgage Insurance

This Tuesday, May 16, 2017, photo shows a sign indicating an existing home is under contract, in... [+] Roswell, Ga.

The soaring home prices all around the country have made it more difficult for buyers to come up with enough money for a down payment. But lenders have caught on to the idea that there are plenty of buyers out there who aren’t in danger of defaulting on their loans, they just need a little wiggle room when it comes to the hard cash they have to bring to closing.

That means we can all say hello to the low down payment mortgage option and its many variations. (Below I’ve listed 12 national-level programs, but thanks to readers I’ve also compiled a list of 47 programs by state, including 30 with no mortgage insurance requirements).

The most common type of low down payment mortgage is the government-backed Federal Housing Authority or FHA loan. Even though they usually require only a minimum of 3.5% down, they come with the huge downside of requiring mortgage insurance for the life of the loan for anyone who puts down less than 20%. Yep, that means if you get to the point of having paid off enough of the mortgage to reach 20% equity you are still required to pay the mortgage insurance. The purpose of the insurance is to protect the lender in case you default on your loan and the only way to get out of it is to refinance once you paid enough down to cross the 20% threshold. For FHA loans the standard rate for mortgage insurance is 0.8% annually (usually divided in to twelve payments). Though with private lenders it can vary from 0.5% to 1.5% (sometimes even higher). I’ve listed 12 programs below that either don’t come with the insurance requirement, have reduced rates, or some other benefit that might make it worthwhile.

It’s important to keep in mind that just because a mortgage has a low down payment option that doesn’t necessarily mean it is a wise financial move. You can end up being charged a higher interest rate over the life of the loan or have extra fees added on to the initial amount in many cases. I made sure to list ones here that don’t do that to buyers. They are open to most types of buyers but largely cater to first-timers so they have lower minimum credit requirements while still providing competitive interest rates.

So what are the interest rates on the list? Alas, that is the one factor I can’t include simply because it is the variable lenders won’t commit to until they have seen the entire financial picture of an applicant. There is one exception, NACA, that charges the same rates regardless of credit score so check them out if you’re at the lower end of the FICO spectrum.

Whether you are a first-time buyer or a move-up buyer there are still plenty of options for getting a mortgage that doesn’t come with the same stringent requirements home loans used to have five or more years ago. Lenders are coming up with safe ways to get buyers a home even if they don’t have a lot of cash and they aren’t charging outrageous rates to make it happen. You could be a homeowner sooner than you thought possible.

Bank of America: Their Affordable Loan Solution is a fixed-rate product geared toward first time homebuyers or those without a large down payment option. They also work with down payment assistance programs in each state which may be a way to get you an even bigger amount to put down.

  • Minimum credit score: 640
  • Down payment as low as 3%
  • No PMI
  • Cannot own another property at time of purchase
  • Homeowner education may be required for first-time buyers (no charge)
  • A $200 bonus possible if you apply before November 30, 2018.

Flagstar: One of their mortgage options is the Professional Loan which is designed for buyers who are on the cusp of having a higher earning potential—such as those who have just finished school or are just starting in their career. They look at each individual situation to determine eligibility and credit requirements but if you have a score of 720 or higher you could qualify for a zero down mortgage.

  • Minimum credit score varies by situation
  • As low as zero down, with a 720 credit score
  • No PMI
  • Applies to mortgage balances up to $850,000
  • Student loan debt may be excluded from payment ratios

Suntrust: Their Agency Affordable Financing product is in conjunction with the Fannie Mae HomeReady and Freddie Mac Home Possible programs but according to their website buyers may be eligible for reduced insurance rates. You have to complete an online homebuyer education course.

  • As low as 3% down
  • All of the down payment can come from gifts or seller contributions
  • Reduced insurance costs
  • Closing costs can be exchanged for a higher rate on a fixed-rate loan

Costco: If it isn’t gallon-sized bottles of ketchup that you need, but a mortgage then Costco Mortgage Services could be a good place to get your home loan. While they aren’t a lender themselves, they facilitate loans with approved lenders and according to their website over 105,000 loans have been funded via their mortgage program. One unique piece of their program is the low origination fees for Costco members that can’t go higher than $350 or Executive level members or $650 for Gold Star members.  

  • Minimum credit score : 620
  • As low as 5% down for a conventional loan
  • Low origination fees for Costco members. Capped at $350 for Executive level members and $650 for Gold Star level members

Rocket Mortgage: Under the auspices of Quicken Loans, Rocket Mortgage is the company that promises to streamline the mortgage process and provide quick turnaround for both approving a loan and getting the money in your hands. They have several options for people with very low credit scores. They can also underwrite a loan before you decide on a property. In a competitive market this can help you stand out from other buyers because it shows you won’t have issues with financing.  

  • Minimum credit score: 580
  • As low as zero down (for qualified buyers)
  • Can underwrite loan before you decide on a house
  • Many options have no pre-payment penalty

NACA: The Neighborhood Assistance Corporation of America is a community advocacy organization with a very grassroots mission of making homeownership accessible. They look at each case individually to determine eligibility and are not strictly bound by the usual requirements for credit scores or down payment amounts. Your credit score does not impact the interest rate. 

  • No minimum credit score
  • No PMI
  • No closing costs
  • No points/fees
  • Zero money down options
  • Borrower can’t own another home at time of closing

Carrington Mortgage Services: Even though Carrington is a smaller lender they provide mortgages in all fifty states and D.C. For low down payment options they provide FHA loans but they have lower minimum credit scores than most of the larger lenders. They also don’t charge an application fee.

  • Minimum credit score:
  • 550 for 10% down
  • 580 for 3.5% down
  • 640 for 5% down with a conventional loan
  • No application fee

SoFi: The non-bank lending institution that made a splash a few years ago is still offering their SoFi mortgages and shows no sign of slowing down. They do have a non-borrower paid PMI option for lower down payments but that usually that means the interest rate is higher. If you only plan to be in the home for a short time it may make financial sense to go with that option.

  • Minimum credit score: 660 (680 for jumbo loans)
  • As low as 10% down
  • No origination fees
  • No pre-payment penalties
  • No borrower-paid PMI
  • Property needs to be your primary or secondary home for at least twelve months
  • If you have another loan with SoFi (such as a student loan refinance) you can be eligible for a .125% rate discount on your mortgage

Chase: The Chase DreaMaker product has a slightly lower minimum credit score but can come with reduced insurance rates for qualified buyers. It also has the possibility of a $500 credit if you complete a homebuyer education course (there is no charge for the course). To find out more info go to the Chase mortgages page and scroll to the bottom. (This has been updated to reflect the minimum credit score is 620, not 680 as we were originally told).

  • Minimum credit score: 620
  • As low as 3% down payment
  • Entire down payment can come from outside sources (such as gifts or grants)
  • Reduced insurance compared to standard PMI rates
  • May be eligible to receive $500 if you complete a homebuyer education course. 

CitiMortgage: Their HomeRun product has similar rules to most other low down payment mortgages but comes with an extra requirement of needing to have one month’s mortgage payment in reserve in the account you use for your monthly payment. If you have an excellent credit score this may be able to be waived.

  • Minimum credit score: 640
  • No PMI
  • One month’s mortgage payment in reserve required
  • Not available in every market
  • Single family home as low as 3% down up to jumbo loan limit ($453,100)
  • Condo or co-op as low as 5% down up to jumbo loan limit ($453,100)
  • As low as 5% down for markets that qualify for the higher jumbo loan limit ($679,650) 

Wells Fargo: Even though it is called the yourFirst Mortgage product you don’t necessarily have to be a first time buyer to qualify, but it is geared for people who are early in their real estate buying years. Also, in some situations—such as family or roommates—they’ll count the income of other residents in the home as part of the household income even they aren’t borrowers on the loan.

  • Min credit score: 620 (suggested)
  • Willing to accept lower credit scores if higher down payment or other
  • As low as 3% down payment
  • Use gift funds and down payment assistance
  • No area median income requirements

New American Funding: Another of the lenders that can write loans for low credit scores, New American Funding can also adjust the payment amounts according to the length of time you want the mortgage to last. If your job or retirement plans means you’ll be in a house for a known amount of time this could work out to be better than the standard 15, 20, or 30 year timeframes. 

  • Minimum credit score: 580
  • As low as 3% down
  • Can qualify for a reduced mortgage insurance rate
  • No pre payment penalty
  • Not tied to 15, 20, or 30 year time frame

Filed Under: Blog Tagged With: mortgages, real estate, real estate advice

What is a Home Equity Line of Credit (HELOC)?

November 18, 2019 by chorton Leave a Comment

What is a Home Equity Line of Credit (HELOC)?

heloc

If you’re a homeowner and have a large expense coming up, you may have heard of a home equity line of credit—also referred to as a HELOC—as a potential solution. A HELOC can be a great way to get a loan, and often has a lower interest rate than you’d pay otherwise. But what is a home equity line of credit, and how does it work? Below, we’ll go over all of the basics that you need to know about home equity line of credits, including what they are, how they function, and what you need to do to apply.

What is a Home Equity Line of Credit?

A home equity line of credit is a loan that you take out using the equity you own in your home as collateral. The more equity that you have in your home, the more that you can borrow.

Most homeowners who use a home equity line of credit do so only for very large expenses, such as home renovations, new cars, and university tuition fees. Many also consolidate existing loans into a HELOC in order to take advantage of lower interest rates.

Perhaps the easiest way to understand a home equity line of credit is to equate it to a credit card. You borrow from the equity in your home, withdrawing funds as you need to, as opposed to taking one lump sum payment. These funds can be accessed whenever you need them (for example, if you have unanticipated travel expenses or medical bills that you need to cover), though they can not exceed the amount of equity you currently own.

HELOC vs. Conventional Loan

There are a couple of differentiating factors between a home equity line of credit and a conventional loan.

For starters, a HELOC generally has variable interest rates, which means the interest rate can “float” (i.e. change) over the course of the loan period. With a conventional loan, you almost always lock in at an interest rate that doesn’t fluctuate during the loan’s term. It’s worth noting however that some lenders will offer fixed interest rates on a HELOC, so if you’re interested in that you can certainly inquire.

Another difference is that a home equity line of credit often has lower interest rates. Because you already have the equity available, a HELOC is considered a less risky investment for lenders, which in turn allows them to offer lower interest rates than you might get with a conventional loan.

The third major difference between a home equity line of credit and a conventional loan is the payout. As mentioned above, a HELOC functions similar to a credit card, with a set limit that you can borrow up to. This is different from a conventional loan, where you borrow a pre-determined amount all in one lump sum. So if you have $100,000 in equity on your home, you can borrow up to that amount. That means you can borrow $4,000 for a vacation, $20,000 for a new car, $30,000 for home improvements, and so on, with the cap being the amount of your home you actually own.

Note that with a HELOC, you only pay interest on the amount that you borrow—not the potential amount that you could borrow. So if you take $20,000 of your $100,000 in equity for a new car, you’ll only pay interest on that $20,000.

HELOC Repayment

There are two major time constraints on a home equity line of credit: the draw period and the repayment period. Together, most HELOC repayment periods last about 30 years—10 years for the draw period and 20 years for the repayment period.

The draw period is when your HELOC is active, meaning that you can borrow against your equity any time during this period, which generally lasts 10 years. During the draw period, you only have to pay interest on the loan and are not required to contribute to principal.

The repayment period starts after the draw period has ended and is usually about 20 years. At this point, you would have to take out another HELOC if you wanted to borrow from your equity. You’ll also have to start making both interest and principal payments toward the loan. Remember that most home equity lines of credit have variable interest rates, so the interest rate you were given when you originally withdrew the loan may not be the interest rate you have when you begin the repayment period.

How to Apply for a Home Equity Line of Credit

You can apply for a home equity line of credit much like you would apply for a second mortgage. In order to determine whether your qualify for a HELOC and what your borrowing limit and initial interest rate will be, a lender will look at a number of factors, including:

    • How much equity you currently have in your home
    • Your income
    • Your debt-to-income ratio
    • Your credit score

A lender will also want to know your employment status and history, as well as have an appraisal conducted on your home. Generally, you’ll know whether you’ve been accepted for the loan after the lender has verified your income and completed the appraisal.

What if You Sell Your Home?

A common question that homeowners have in regards to HELOCs is “what happens if I sell?” The answer is that you’ll have to pay off your home equity line of credit when you sell your home, even if you’re still in the draw or repayment period.

Most of the time, you should have no trouble paying back your HELOC, since you’ll be selling your home for more than you owe (in turn leaving you with money left over to pay the loan back).

However, complications do arise if you’re underwater on the sale. If that’s the case, you will still have to repay your home equity line of credit, but you’ll have to find another way to secure the funds. You can do so through savings, or you may have to initiate a short sale with your lender.

Is a Home Equity Line of Credit a Good Idea for You?

A HELOC is considered to be one of the best ways for homeowners to secure a loan for large purchases. To figure out if it’s the right move for you, take a few factors into account:

    • How much equity you currently own in your home
    • How long you intend to stay in your home
    • What type of expense you’re looking to secure the loan for

A home equity line of credit is usually used for large purchases, as opposed to day-to-day spending. Think of it like a rainy day fund that you can tap into when savings just won’t cut it. Keep in mind though that you’re better off establishing a fair amount of equity before taking out a HELOC, since you don’t want to cap your borrowing limit too low.

Note that you will have closing costs associated with your home equity line of credit that you’ll need to budget for. These include your application and processing fees (usually $100+, though many lenders refund this amount if your application is denied), an appraisal fee (about $150 to $250), an origination fee (about 1% of the amount you’re borrowing), and attorney’s fees (since you won’t want to go about the process alone).

As with all loans, never take out more than you can afford. Any line of credit can be a slippery slope if you don’t have the means to pay it off over time, and a home equity line of credit is no different. Evaluate all your options and be sure to look over your loan amortization schedule to ensure you can handle payments with your current income.

Filed Under: Blog Tagged With: advice, credit, heloc, tips

Raw Land Investing With Confidence: Everything You Need To Know

November 15, 2019 by chorton Leave a Comment

Raw Land Investing With Confidence: Everything You Need To Know

With the right knowledge and experience at their disposal, raw land investing can be highly lucrative for real estate investors. At the very least, those interested in buying land are only limited by their imagination and zoning regulations. The key to successful raw land investing is a unique combination of due diligence, hard work and attractive profit margins. Continue reading if you are interested in investing in land with more confidence.

What Is Raw Land?

Raw land is a plot of land that has not been developed or prepared for construction; it’s completely untouched terrain. Despite an inherent lack of grading and subdividing for construction, however, raw land investing is becoming increasingly popular among real estate investors. This begs the question: Is buying land a good investment for everyone? Not surprisingly, the answer is completely dependent on what an investor may want out of a respective deal.

For some, raw land investing may sound counterintuitive. Likewise, investing in land should be reserved for those with more patience and a penchant for long-term strategies. Consequently, there are also several reasons someone may want to buy raw land. Specifically, investing in land represents a blank canvas for those with the foresight to do so properly—raw land may be developed into whatever the investor sees fit. Perhaps even more importantly, investing in raw land has become synonymous with persistent cash flow and appreciation.


[ What’s the best investment strategy for YOU? Take “The 10-Minute Real Estate Investor Personality Test” and find out ]


investing in land

Does Land Appreciate?

Raw land is categorically and objectively an appreciating asset for two simple reasons: limited supply and increasing demand. There is a finite amount of available land that has yet to be built upon, making it a very attractive commodity in a world where the population is increasing exponentially. Therefore, in accordance with the most basic economic principle (supply and demand), raw land will inherently increase in value as demand grows for the limited asset. It is no longer a question of whether or not land appreciates, but rather how much it will appreciate.

How Many Years Can You Finance Land?

The amount of time a traditional lender will allow borrowers to finance a land investment will vary. There are several variables that will determine the loan duration one may expect to receive for raw land, not the least of which includes the plot’s location and its use. For example, lenders are more willing to extend their loan durations for plots of land that exhibit a degree of intrinsic value. If for nothing else, a promising plot of land represents a less-risky investment on the bank’s behalf. That said, those investing in land shouldn’t expect considerably long loan terms. Buying raw land typically coincides with short, restrictive payment terms. While some raw land investors may be able to increase the length of their loan, most terms will be limited to about 10 years or less.

What State Has The Cheapest Land Per Acre?

Not unlike every real estate exit strategy know to today’s investors, investing in land coincides with an inherent degree of risk. Raw land investing for future gains is far from a guarantee, but that doesn’t mean it’s impossible. The trick is to find relatively inexpensive plots of land with plenty of potential for future prospects. For those of you thinking about buying raw land with the intentions of making a profit in the future, here’s a list of five states where raw land prices remain affordable compared to their future potential:

  • Tennessee

  • Arkansas

  • West Virginia

  • New Mexico

  • Arizona

6 Benefits Of Raw Land Investing

It goes without saying, but there are always risks and rewards associated with any type of investment deal, whether it involves raw land or not. The key, however, is understanding your exit strategy, weighing your options, and making the appropriate decision based on your desired results. That said, research will ultimately define your success with a raw land investment. The current conditions of the market, demand for housing, mortgage rates, the local economy, and new housing construction will all play a critical role in how you benefit from your raw land investment.

For investors, the advantages associated with a raw land investment include:

  • Easy to acquire

  • Little-to-no competition

  • Low cost to own and maintain

  • Potential for quick profit

  • Flexibility to build or hold

  • Potential for passive income

Although the benefits of raw land investing are far and wide, they won’t be achieved without due diligence on the investor’s behalf. As part of your due diligence, running the numbers will serve to not only determine if you can afford the land, but if it’s actually financially viable. The numbers never lie, and in this case, they will almost always forecast whether your raw land investment is worth it or not.

Land Investment Tips: How To Invest In Land And Profit

Now that we understand the potential benefits of a raw land investment, it’s time to take a look at the various ways investors can make money by investing in land:

  • Investors can divide a single plot into several plots to increase its value.

  • Investors can develop on raw land to increase its use and value.

  • Investors can simply buy and hold raw land, as it has historically appreciated more often than not.

  • Investors can lease the land, long or short-term, for a number of reasons to collect rent.

Subdivide For Land Sales

The first way investors can make money off their raw land investment is by subdividing it for land sales. Investors have the potential to increase the total value of their investment by separating it into smaller lots and selling them individually to buyers. In many cases, the subdivided land can be more valuable than the whole. This is due to marketability, and the fact it might be easier to find a buyer for a smaller, more affordable parcel of land, as opposed to one large lot.

The subdivision process of raw land consist of two parts: mapping and legal documentation. The mapping aspect refers to the proposed subdivision area and how it should be defined, while the legal documentation involves submitting the proposed subdivision, which generally includes an application and fee, to the local county. If the application is approved, the subdivision mapping is recorded in the county records.

Develop It

As cities expand, the flexibility of raw land investing continues to be its biggest strength. For many investors, one of the more popular ways of making money with raw land is by developing it into something more.

Depending on the location and zoning regulations, a raw land investment can be developed into a plethora of things, including a residential, multifamily, or even commercial property. In fact, a raw land investment can sometimes be developed into multiple entities, which can ultimately produce a multitude of revenue sources for investors. In addition, this land can become very valuable over time as home and rental prices go up.

Buy And Hold

Thanks to inflation, one of the primary sources for a return on investment with raw land is through appreciation. Because the price of land today has the potential to become more valuable in coming years, buying and holding onto undeveloped land has the potential to earn viable returns for investors, especially in the long-term.

In addition, there are various options for investors to purchase raw land below market value. From auctions to county tax sales, investors have numerous options to obtain land at discounted rates, which will only enhance their ability to earn a positive return. Additionally, investors are recommended to conduct their due diligence when purchasing land through the auction process. In many cases, these deals can be full of risk with little-to-no upside.

Lease It

There are many businesses looking to lease land on a monthly and yearly basis. Generally speaking, these operations need undeveloped land to conduct their operations. A land lease, which is also known as a ground lease, allows individuals and/or companies to rent a parcel of land rather than purchase it. In addition, a raw land investment can be leased for other purposes, including billboard rentals, cell towers, ranchers, and utility companies. This method of earning a profit is very similar to other types of leasing programs, which aims to earn a monthly return on the property through a lease agreement.

How To Evaluate Your Raw Land Investment

The strategy you choose will ultimately guide your search for the perfect piece of raw land. The reason for this is that each investment type will require slightly different characteristics when it comes to the land. For example, the optimal buy and hold plot will likely be in an entirely different area than one intended for billboard rentals. Buy and hold plots tend to appreciate faster in up and coming markets, while land for advertising can be in smaller markets, as long as they are high-traffic areas. Location is not the only thing to consider when evaluating a raw land investment. There are a number of other factors that should come into play before you agree to sign on the dotted line. Review the following questions next time you consider a potential raw land investment:

  • Where is the plot located? While location is not the only thing investors should evaluate, it is the most important. The location of a raw land investment determines the viability of the deal. The plot could be spacious and affordable, but if it’s truly off the grid it may not make the most sense as an investment. Determine your strategy, and narrow down different market areas with options to choose from. For example, if you are hoping to complete a new construction project research expanding neighborhoods in your market area. Once you have an area in mind, then begin searching for the right piece of land.

  • How is the property zoned? A property zone essentially designates what it can be used for, like commercial or residential space. Land can be rezoned, in fact it happens all the time, however this process can greatly impact the timeline of a given investment deal. According to Legal Match, the rezoning process can take around 180 days to be completed. Depending on your exit strategy this can increase holding costs and significantly delay potential profits. Always be aware of a property’s zone before investing to avoid being blindsided by any regulations.

  • Are any utilities available? When most people think of raw land, the first thing that comes to mind is typically a plot of land out in the middle of no where. Although this is not always the case, some land can be located in rural or completely undeveloped areas. That’s why it is crucial to learn what type of resources are available at the property before closing. Are there water lines or electricity? What about internet? These factors can influence not only the overall cost of the deal but also the potential timeline of the project—as you may find yourself waiting for utility companies.

  • What is the history of the land? Similar to the purchase of a residential or commercial property, it is always necessary to complete a title search. Look at the title history of the land and determine whether there are any ownership disputes. Pay special attention to how long the current owner has had the property. If they are trying to sell quickly after owning it, it could signal there is an issue with the property (though they could just be ready to get rid of the investment).

  • Are there any other issues with the area? Before making an offer on a raw land investment, it is a great idea to hire a land surveyor to check out the property. A land survey will confirm the boundaries of the plot and identify any potential restrictions. For example, the land may be in a designated flood zone. Depending on your plans for the land this could greatly affect the potential profitability of the deal. Take precautions when purchasing raw land by doing your homework and hiring a professional land surveyor.

Is Investing In Raw Land Right For You?

In order to be absolutely sure whether or not raw land investing is right for you, ask yourself the following questions, and answer them sincerely:

  • Can You Manage Risk? Although raw land investing tends to be predictable, as with any type of investment, there is always some risk involved. If you are the type of person who is easily overwhelmed by the unknown or you are someone who jumps into things hastily, raw land investing is not a niche you should pursue. When you invest in a plot of land, you are essentially predicting the future. The moment you put money down on the table, you are saying, “I believe that what I am buying into will increase in value overtime.” While, in theory, you are probably right, there are some things that are out of your control.

  • Are You Financially Organized? When it comes to raw land investing, more than likely, you will not realize a profit as fast as you would if you were rehabbing or wholesaling properties. Because of this, it is crucial that you are vigilant about organizing your finances. This should not, however, deter you from undeveloped real estate. Because raw land is a buy and hold investment by nature, it can be a while before your land appreciates enough to produce cash flow. If you are a novice investor, you must perform an honest evaluation of where you stand financially. If you are a seasoned investor, you must assess the state of your finances in terms of your current investments and how you want your business to grow. If you are inherently frugal and make money saving a hobby, it is likely that you will realize success as a raw land investor.

  • Will You Prioritize Research & Due Diligence? Raw land investing is all about asking the right questions, and if you’ve never purchased vacant land before, you are probably not up-to-date on the jargon and terminology. Before investing in any land, it is vital to first research the market. Has there been recent development in the area? Is your plot of land in the path of future growth? If the answer is yes to either of the above question, your property already meets some crucial criteria. Next, you should talk to your lawyer, the seller, and you inspector’s about the zoning on the property. Are there clear boundaries drawn on the plot? Is it zoned for commercial, residential, industrial, mixed-use, or agricultural development? What was the land used for previously? Asking and getting specific answers to all these types of questions is an absolute must. Also be sure to ask questions about the land’s topography, required annual taxes, available public utilities, usage restrictions, and road access. Minding due diligence and researching the right questions are what sets apart the successful raw land investors from the not-so-successful raw land investors.

  • Do You Have Support? Unfortunately, raw land investing is not a “get rich quick” plan. It takes a lot of hard work and perseverance to realize success in the real estate investing world, which is why a solid support system is crucial to have. While it is important to rely on yourself as an entrepreneur, your own personal cheerleader is nice to have when times get tough. Whether this be a business partner, fellow investor, or family member, you are more likely to be successful compared to someone going into raw land investing alone. If you are having trouble finding your support system, consider joining a local REI group or even create your own Meetup.com group. Isolate yourself from the naysayers in your life and find people who are there to help you stay motivated.

Summary

Raw land investing is not a strategy without fault. Not unlike every other exit strategy in the real estate industry, raw land investing coincides with an inherent degree of risk. However, educating yourself on the topic will not only give you the confidence you need to commit, but also increase your chances of realizing success.

Filed Under: Blog, Real Estate Advice Tagged With: advice, investing, real estate investing, tips

How To Light Your House The Right Way

November 15, 2019 by chorton Leave a Comment

How To Light Your House The Right Way

It might be a design cliche, but good lighting truly is everything. Lighting affects the ambiance and mood of a space — get it right and the whole look of your interiors will improve. These are my top 10 tips and considerations for creating a well-lighted home.

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Photo by Thomas Coombes Interior Design

1. Consider ceiling height. Knowing your ceiling height is important when selecting hanging light fixtures. Some lights come with adjustable cables or rods, but others don’t. Don’t get stuck with a light that hangs too low or too high.

As a rule of thumb, the bottom of a light should hang about 12 to 20 inches below a standard 8-foot ceiling. For each additional foot of ceiling height, add 3 inches.

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2. Table hopping. When hanging a light over a table or a kitchen island, 28 to 34 inches is the recommended distance from the bottom of the light to the surface of the table or island. However, the size of the light makes a difference. In general, a smaller light can be moved lower and a larger light can be moved higher.

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Photo by Rob Mills Architects and Interior Designers

3. Plan it out. Consider your lighting preferences during the initial design phase of a new build or renovation. For example, if you want three pendant lights over your dining table instead of one or two, that should be taken into account before construction starts.

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Photo by Andrew Snow Photography

4. Get your swag on. If you are adding new pendant lighting but don’t want to deal with the expense or hassle of changing your home’s electrical setup, cord swags can be a stylish solution. Swag them loosely over a bar or a hook, as seen in this kitchen, or secure the cord tight to the ceiling for an industrial look.

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5. Turn it up. Don’t limit lighting to downlights. Depending on the location, consider wall sconces or uplighting to create a softer ambiance and avoid potentially harsh downlighting that can cast ominous shadows.

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Photo by Highmark Builders

6. Know your glow. The light fixture should not be your only consideration — the type of lightbulb is equally important. Halogen, compact fluorescent and LED bulbs come in a range of warm or cool hues. Much like the color of your walls, the type of glow you want is mostly a personal decision.

If your walls are covered in cooler tones, you might want to warm them up with a lightbulb that casts a warm glow. Conversely, you may want a cooler glow to brighten up a darker space.

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Photo by peter_pan

7. Light up those stairs. Adding lights to stair risers is beneficial since it can be hazardous negotiating stairs, especially at night. Staircases are often enclosed, so light them from the sides or embed lights in the risers as a design element.

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Photo by LMK INTERIOR DESIGN

8. Toe-kick lighting. Don’t think that adding lights to your toe-kicks is a frivolous, aesthetics-only decision. Strip lighting at the underside of base cabinets is a great way to create a night light that looks fabulous.

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Photo by Amitzi Architects

9. Don’t shy away from color. Putting a light fixture in a bright hue in an otherwise simple room can add some fun and interest to the space. Colored shades can work wonders, especially when the light is turned on.

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Photo by Amy Noel Design

10. Be decorative. Adding lights as decorative elements helps set a mood in a space. Provided that general lighting is already installed, using lights instead of wall art can be a decorative way to provide ambient lighting.

 

Filed Under: Blog Tagged With: decorating, remodel, remodeling, tips

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