Archive for the ‘Real Estate’ Category

All About The Mortgage Process

Thursday, November 6th, 2008

Getting a mortgage can be a confusing process.  There’s a lot of paperwork and there are many loan programs to choose from.  In this post, I’ll provide an overview of the mortgage process and what you should expect from a mortgage consultant.

Goals

The mortgage process is substantially similar whether you are purchasing or refinancing a property. In both cases, your mortgage consultant should start by asking questions and listening to your goals.  That way, he or she can help you achieve your goals.  However, too many mortgage consultants start by telling you what to do based upon what is most profitable to them.

Your consultant should ask a number of questions, starting with, “What type of property would you like to purchase or refinance?”

  • If you want to make a purchase, your consultant will want to know…
    • What is your price range?   If you don’t know, he or should should be able to help you determine the price range for which you qualify.
    • How much money would you like to invest, if any?  Despite the credit crunch, there are still loan options that do not require significant down payments.
    • How much money do you have for closing costs and prepaid expenses, if any?
    • Is the monthly payment amount important to you?  If so, how much would you be comfortable paying on your mortgage each month?
    • How long do you intend to own the property?
    • Are you working with a real estate broker or sales agent?  If not, the consultant should be able to refer you to someone in the area in which you wish to purchase.
  • If you want to refinance, your consultant will want to know…
    • What are you trying to achieve in pursuing a refinancing?
    • How long do you intend to own the property?
    • What is the estimated value of the property?

By listening to your goals, your mortgage consultant can help you determine the loan programs best suited to achieve them and to meet your needs.

Prequalification and Preapproval

Prequalification and preapproval only occur in the purchase process, so if you are refinancing, you can skip this step.  In some locales, prequalification is the norm and in others, home sellers and real estate brokers and agents will require you to be preapproved.  You do not need to have a specific property in mind to get either a prequalification or a preapproval.  However, in both cases, your personal mortgage consultant sahould assist you.

  • Prequalification – Prequalification is an estimate of your purchasing power.  In short, it is an estimate of the price you can afford to purchase a property.  Your mortgage consultant will order your credit report and ask questions about your employment and income.
  • Preapproval – Preapproval means that based on the information you provide, a lender issues a loan approval with conditions.  Your mortgage consultant will order your credit report and ask questions about your employment, income and assets.  Depending on your goals, he or she may provide you with a checklist of information required for a preapproval.  Once your mortgage consultant collects the information, he or she then submits the information to a lender (or, if he or she works for a lender, it is processed through the lender’s system).  The lender will issue a preapproval with conditions that will vary depending on the property and on you and your circumstances.

Getting preapproved is a more thorough process than prequalification, but one is not numberswiki.com

necessarily better than the other.  It depends upon what is the norm in the place where you want to purchase a property.

Application

Your mortgage consultant will put together and submit a loan application and related documents and submit them to a lender.

  • If you previously have been preapproved to purchase a property, you’ll most likely only have to update the information you provided when you applied for a preapproval.
  • If you are refinancing or previously were prequalified to purchase a property, your consultant will ask you questions about your employment, income and assets.  Depending on your goals, he or she may provide you with a checklist of information required to complete the loan application.  Your consultant will order your credit report if it has not previously been ordered.

Depending on the type of property, the loan program and your personal circumstances, you may have to provide documentation supporting your income, assets or employment. Your mortgage consultant will advise you of the requirements. He or she should guide you along every step of the process and answer all your questions.

Processing and Underwriting

When your loan application and related documents are complete, the mortgage broker or lender’s processing center begins work on your loan.  This can include verifying your income and assets, ordering an appraisal of the property’s value and ordering a title search from the lender’s attorney to make sure the property has clear title, among other items.  If you’re working with a mortgage broker, the broker’s processors will transmit the loan package to the lender, who then begins the underwriting process.

In underwriting, the lender will evaluate the information that has been collected about you and your property.   Lenders have thousands of loan programs for residential and commercial purchases, refinances, construction or investment.  Therefore, the underwriting criteria will vary for each loan and according to your personal circumstances.  However, some factors the lender will consider in its evaluation are the value of the property and whether it believes you can repay the loan in a timely manner.

Upon making a satisfactory underwriting determination, the lender will issue a formal loan approval, known as a mortgage commitment letter or conditional approval letter.  The letter will state the terms and conditions under which the lender is willing to make the loan.  The conditions will vary depending on the property and your personal circumstances.  A typical condition, though, is that the property must have an appropriate amount of insurance.

The processor typically will work with your mortgage consultant and the lender to satisfy the conditions set forth in the commitment letter.  Once the conditions are satisfied, the loan will be ready for closing.

The Closing

At the closing, you will sign various documents that allow your loan to be put in place.  These include a mortgage (evidencing the lender’s interest in your property), a promissory note or mortgage note (your promise to repay the loan according to specific terms and conditions) and other similar documents.  If you are purchasing a property, the seller will transfer title to it to you at the same time.

At the close of the transaction, the mortgage is recorded in the land records of the city or county (Where the recording occurs varies depending on the state in which the property is located.).

Post-Closing

Good service does not end with the close of your transaction.  If you have any questions or concerns in the future regarding your mortgage, a good mortgage consultant will be there to assist you.

Foreclosure and Two Ways to Avoid Going Through It

Tuesday, October 21st, 2008

Foreclosure means that a borrower can not make the required principal and/or interest payments on a loan secured by an interest in property.  Because of the borrower’s default, the lender has a right to terminate the borrower’s interest in the property.  The procedures vary from state to state, but the end result is that the lender either can take ownership of the property or sell it and the borrower’s equitable or statutory right to redeem the property is barred forever.

Approximately 95% of all residential mortgages in the United States are being paid on time.  That means that there are problems with about 5% of mortgage loans.  If mortgagors (e.g., the homeowners / borrowers) do not pay their mortgage loans, they will lose their homes.

Two other options exist for those facing foreclosure.  First, the borrower can offer a deed in lieu of foreclosure.  This means that instead of waiting for the foreclosure process to occur, the lender consents to accepting the borrower’s property interest immediately.  If the value of the property is below the remaining mortgage debt, the lender usually agrees to forgive the difference.

The second option is known as a “short sale.”  In this case, the borrower sells the property for less than the remaining mortgage debt.  The lender’s consent is required and, as in a deed in lieu situation, the lender usually agrees to forgive the excess owed on the debt.

In both options, the homeowners lose their homes.  Yet, this still can be preferable than going through foreclosure.  First, it takes less time, so the home owner who knows there is no way he can keep his home can shorten the process and the pain.  Second, the home owner also will no longer be legally obligated to pay the debt.  Third, if a foreclosure occurs and the home is later sold for less than the amount owed on the debt, some states allow a lender to pursue the unpaid amount.  However, with deed in lieu or a short sale, the lender almost always consents to forgive any remaining debt.

Real Estate Investment Trusts

Monday, September 15th, 2008

As a follow up to my last post noting that hard assets, such as real estate, tend to be good inflation hedges, I wanted to provide some basics on real estate investment trusts (“REITs”).  A REIT is an investment vehicle that owns either mortgage notes, real estate or a hybrid that both mortgage notes and real estate.

REITs came into being in 1960.  Most REITs at that time were mortgage REITS – they owned mortgage notes on real estate assets.  However, today, real estate and hybrid REITS are common.  Via securities, a REIT allows one to invest in large, income-producing real property.  That said, REITs come in a variety of flavors and can be sliced and diced a number of ways.

In the United States, three types of REITs as securities exist.  Publicly-traded REITs register with the U.S. Securities and Exchange Commission (the “SEC”) and trade on national stock exchanges.  The are also non-exchange-traded REITs, which also register with the SEC, but which don’t trade on a stock exchange.  Finally, private REITS neither register with the SEC nor trade on a stock exchange.

Additionally, REITs may be distinguished by the type of real estate they invest in.  This can be either broad or narrowly-focused.  For example, there are office REITs, multifamily property REITs, hotel REITs, shopping center REITs, warehouse REITS and storage facility REITs.

Another way a REIT may differentiate itself is for it to focus on a specific state or geographical region.

Companies must qualify to be classified as a REIT.  To do so, they must meet specific requirements of the Internal Revenue Code.  These requirements include the following:

* The REIT must be managed by a Board of Trustees or a Board of Directors.

* The REIT must be taxable as a corporation.

* The REIT must have 100 different shareholders.

* No more than 50% of the REITs shares may be held by five or fewer individuals.

* REIT shares must be fully transferable.

* At least 75% of the REIT’s gross income must be real estate-related, such as from rents or mortgage interest.

* At least 75% of the REIT’s total assets must be real estate assets.

* The REIT’s stock in its taxable subsidiaries may not be more than 20% of its total assets.

* A REIT must distribute at least 90% of its taxable income to shareholders as dividends.

These are some, but not all, of the main limiting characteristics of a REIT. A good book on real estate syndication in general, including REITs, is Samuel K. Freshman’s Principles of Real Estate Syndication.

Inflation and Hard Assets

Sunday, September 7th, 2008

We’ve had many years of low inflation in the United States.  In the past year, however, inflation has increased.  The U.S. economy is complex and many reasons are behind this acceleration.  For example, the industrialization of the economies of China and India have increased the demand for commodities, which are used to build infrastructure.  So the prices of commodities, such as steel and oil, have risen as demand has increased globally.

The law of unintended consequences also has played a part in inflation.  Congress passed and President Bush signed the Energy Independence and Security Act, which mandated a huge boost in the use of corn-based ethanol.  This occurred at a time when world grain stocks are at a 30-year low and prices at historic highs.  With more demand for corn, prices shot up.  Livestock producers and food processors incurred greater costs, as corn is a staple of livestock feed.  As a result, the cost of food rose and now, for example, eggs cost 40% more than they did a year ago.  In fact, even the prices for non-food crops rose as farmers switched from them to grain crops, which are more lucrative.

So what holds value during inflationary times?  Hard assets typically do.  One such hedge against inflation  is real estate.  Despite the housing downturn due to the subprime crisis and resultant credit crunch, real estate historically has been a good long-term investment when inflation accelerates.  Although the market is not at its peak, we haven’t seen a decline in U.S. commercial real estate comparable to the residential slump.  Good value may lie in commercial real estate investment over the next few years.