Removing or Adding a Person to a Loan

In divorce situations, it is common, for the spouse who keeps the home to refinance to remove the other spouse from the loan.  Equally as common, first-time buyers who don't have enough income to qualify may ask a parent to co-sign and must add their name to the mortgage.

Another situation that requires removing or adding a person to a loan could be to qualify for a better interest rate.  The difference in a minimally acceptable credit score and something that might be considered "good" could be as much as a 0.5% higher rate for the term of the mortgage.

Consider that a couple is buying a home on a conventional loan, and they have individual credit scores of 760 and 670.  The underwriters will price the loan based on the lower of the two scores.  A half percent interest on a $400,000 30-year mortgage could have close to $110 a month difference.

A possible solution to this dilemma could be available, assuming the borrower with the higher credit score had enough income to qualify for the mortgage separately.  If so, that person would be eligible for the lower rate.

The property could still be titled in both names and if so, that person would be liable for the mortgage should the named borrower default on the loan.

Another scenario that may arise is that a couple has enough income to qualify for a mortgage but because one of the parties has a lower credit score, it will be priced higher.  Having a parent or relative added to the mortgage as a non-occupying borrower to help with the credit score.  Interest rates are determined on the lowest middle of three scores for the borrowers applying for the loan.

Assuming the parent's score was higher than the lower score of the couple, it could improve the rate applied to the mortgage loan.

The value of a trusted mortgage professional is very important.  They can offer alternatives to situations that could be worth tens of thousands of dollars over the life of the mortgage and in some cases, can make the difference in being approved at all.

Your real estate professional would be more than willing to make a recommendation and can support the need to assemble a strong team to help with your transaction.

Keep Your Current Home as a Rental

Let's assume that you have owned your home for several years.  It has increased in value and the unpaid balance considerably less than you originally borrowed.  In short, you have equity in the home.  You're thinking about buying another home and one of the questions going through your mind is "should we find a replacement property before we put our home on the market?

It is a good question but maybe there is another one you should be asking.  "Should we keep our current home and convert it to a rental when we buy another home?  The answer to the question may have a great deal to do with your finances but if you can afford it, it may end up being one of the better investments you have made.

Do you have enough discretionary funds for a down payment and closing costs for your new home?  Is it enough to put 20% down payment so you can avoid paying mortgage insurance?  Can you qualify for the mortgage on the new home with the additional liability of your current home?

You don't even need "yes" answers to all of these to be considering the possibility of converting your home to a rental.  If you have sufficient equity, you may be able to pull part of it out for your down payment and closing costs and still have equity available for other needs.  Lenders will usually make cash out refinances up to 80% of the value of the home.

Another possibility may be to borrow against your qualified retirement program.  The advantages include speed and convenience (it is your money), repayment flexibility, and cost advantage.  If you believe the stock market is moving toward a down position, this could be additional incentive to earn more in the rental.

What makes rental properties so attractive right now is that rents are rising and expected to continue because the factors that make a shortage of homes for sale are the same that make the shortage of homes for rent.  The rent collected, less the mortgage payments and expenses will probably result in a positive cash flow before tax.  The other major factor is that homes are appreciating at a very high rate. 

Using borrowed funds to control an appreciating asset is leverage and it can dramatically affect the rate of return an investor enjoys.  The dynamics of income, appreciation and favorable tax benefits makes rental real estate very appealing.

Your real estate professional can provide information on the value of your current home, estimates for rental income and expenses and in finding your replacement home.  Talk with your tax advisor to see how this alternative would work for you. 

The good news if you choose this opportunity is you will not have to put your home on the market and timing of your new purchase became greatly simplified.  It may even be to your advantage to be flexible with the seller's occupancy which could be a big advantage if you are negotiating against multiple offers.

For more information, download the Rental Income Properties and talk to your real estate professional.

Cash-Out Refinance

With the rapid appreciation that homes have had in the last two years, most homeowners have equity.  A common way to release part of the equity is to cash-out refinance but some homeowners may not be eligible currently.

This type of loan replaces the current mortgage by paying it off and an additional amount of cash for the owner.  Generally, lenders will consider a new mortgage up to a total of 80% of the current value.

Typically, the rate on a cash-out refinance will be slightly higher than a traditional purchase money mortgage.  As is in any lending situation, the rate depends on the borrower's credit and income.  The best interest rates are available to borrowers with higher credit scores, usually over 740.

Loan-to-value can affect the rate a borrower pays also.  A 70% loan-to-value mortgage could be expected to have a lower interest rate than an 80% LTV because there is a larger amount of equity remaining in the property and therefore, less risk for the lender.

There are no restrictions on how the owner can use the money.  It can be used for home improvements, consolidating debt, other consumer needs or for investment.

Eligibility Requirements as found in FNMA Selling Guide B2-1.3-03 Cash-Out Refinance Transactions

"Cash-out refinance transactions must meet the following requirements:

• The transaction must be used to pay off existing mortgages by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it.
• Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan.
• The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
  • There is no waiting period if the lender documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).
  • The delayed financing requirements are met. See Delayed Financing Exception below.
  • If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower's six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B 2-2-01, General Borrower Eligibility Requirements (07/28/2015) for additional details.)
  • If the property was owned prior to closing by an inter-vivos revocable trust, the time held by the trust may be counted towards meeting the borrower's six-month ownership requirement if the borrower is the primary beneficiary of the trust.
• For DU loan case files, if the DTI ratio exceeds 45%, six months reserves is required."

Encouraging Multiple Offers

Based on the current competition due to lower than normal inventories, it is possible for a seller to find themselves on the beneficiary side of a multiple offers.  Two or more parties may be trying to buy your home at the same time and because of the competition, they increase the purchase price, possibly, remove unnecessary contingencies and try to make their offer as attractive as possible.

This can pleasantly result in you realizing higher-than-expected sales price and proceeds of sale.  While it may not materialize, it is good to understand what could happen and the best way to handle it.  Your real estate professional is positioned to offer you specific advice but the following are some things to consider.

One tactic is to delay showings for a short period of time.  Some agents will create this by putting a sign on the property with a rider that indicates "coming soon" and depending on the local MLS rules, it may even be put in the system.  No showings will be allowed until a publicized date, usually, a few days, at which time, the goal is to have prospective buyers standing in line to see the home.

This might even be combined with an open house scheduled for the initial showings.  Agents using this method have sometimes found lines of people waiting outside the home to see it first.

When multiple offers are made, invariably, there will be some disappointed people and for that reason, it is essential to follow a strict procedure to see that no one is given an advantage over other buyers.  Discuss the following suggestions with your professional:

• All offers are countered by asking the buyer to make their "best and final" offer which will include not only price but terms also.
• The seller may authorize the listing agent to disclose that there are multiple offers.  (Article 1, Standard of Practice 15 of the National Association of REALTORS® code of ethics.
• Discuss with your professional their thoughts on revealing information, like price and terms, on other offers you are considering.  In most cases, they are allowed to do so with your permission, and it may make a difference in the negotiations.
• If one offer is substantially better than the other offers, the seller can accept or counter-offer.
• Have your real estate professional advise you of countering more than one offer which could result in contracting to sell your home to more than one person.  They can advise you alternative ways to do this.

Keep this in mind.  Sometimes, the highest offer is not the best offer.  Even though the buyer is willing to pay a high price for your home and possibly, willing to remove the financing condition, if they are going to get financing and it doesn't appraise, it can cause issues. 

Have your real estate professional tell you about asking for proof of funds from a cash buyer or confirming their ability to pay above appraised value.

Your real estate professional can help you realize the most out of your home.

Homeowners Need to Know

In the Boy Scouts, a certification, called a Totin' Chip, is required for scouts to carry, and use woods tools like a knife, axe and a saw.  They must read and understand the use and safety rules from the scout handbooks and demonstrate the proper handling, care, and use of each.

No such certification is required for homeowners but there are a lot of good reasons why it should be self-imposed.  Making minor repairs is part of the responsibility of owning a home that will save both time and money.

A homeowner will certainly appreciate the need for such training the first time a call is made to a service company to fix their air conditioner that suddenly quit cooling.  When the repairman arrives, he has a checklist which includes verifying the unit is getting electricity.  If not, they go to the electrical panel to see if a breaker has been thrown.

It can be very humbling and expensive to have to pay a service fee to have a repairman flip a breaker to get your air conditioning working again.

The basic items every homeowner should be able to do the following:

• Turn off the water in case of an emergency.
• Reset a circuit breaker.
• Change the HVAC filters and clean the outside coils.
• Clean a dryer vent.
• Reset a garbage disposer and dislodge a jam by spinning the flywheel
• Unclog a sink or drain.
• How to plunge a toilet and when to use an auger.
• Re-caulk a bathtub or sink
• Light a pilot light on a water heater or furnace
• Change the batteries on a smoke alarm

YouTube can be a great resource for searching the millions of videos that have been uploaded to help homeowners with all sorts of do-it-yourself projects.  You should be able to find one that addresses your particular situation, and you can determine if you have the skills and tools to handle it.  If not, check our list of Service Providers or just ask for a recommendation.

No Need to Make Common Mistakes

A successful home sale, considered by many owners, is to maximize their proceeds in the shortest time with the least inconveniences.  Just because it is a seller's market doesn't mean that homeowners can shortcut some of the steps that make it happen and they certainly need to avoid commonly made mistakes.

Pricing too high

Low inventory and high demand have contributed to the rising prices of homes.  NAR reports that the median sales price is up 17.8% in the past year and CoreLogic recently released data that July set new record growth of 18% year over year.  This might give sellers a false sense of security about overpricing their home

Pricing a home too high initially can limit activity, attract the wrong buyers and ultimately, cause the home to realize a lower price than optimum.  There is an interesting dynamic that takes place when there is a shortage of homes to show, and a new home hits the market.  Buyers, who have been in the market but not purchased yet, will rush out to see the home.  They are familiar with what homes are selling for and possibly, have even lost bids on one or more.

These savvy buyers expect certain amenities based on the price of the home.  They can tell if a home is priced right or not.

Failure to do Market Preparation

There are people who will buy a home that is not pristine and does not have everything in good working order, but they usually will not pay top dollar for the home.  They recognize the money that needs to be spent and will adjust the price accordingly.

To command the highest price, the home needs to be spotlessly clean with everything working as it should be.  The home needs to be depersonalized to appeal to the broadest group of people.  The clutter needs to be removed so it isn't distracting or give the impression that the rooms, counters, or closets are small.

It is important to evaluate if painting is necessary along with replacing floor covering, appliances and/or light fixtures.

Thinking the agent doesn't matter

Market time is down to 17 days and 89% of homes are sold within a month.  These statistics might be used to rationalize that an agent is not currently playing an important role in the home but that would be a mistake.

Nine out of ten homeowners use an agent, and the four most important reasons were to help sell the home within a specific timeframe, help price the home competitively, help seller market the home to potential buyers and help the seller find ways to fix up home to sell it for more money.

Being present during showings

It may not be convenient, but sellers should try to leave the home when it is being shown.  Buyers like to look at the home freely and ask questions or point out things to their agent.  Sellers may have the best of intentions, but they have not established rapport with the buyer and don't really know what is causing the questions.

Not letting your agent negotiate for you

The role the agent plays as third-party negotiator is one of the most important things an agent does for a seller.  It begins long before buyers even make an offer.  The protocol is for the buyer's agent to go to the listing agent with the question and if necessary, they can ask you and get back to the buyer's agent.

Buyers and sellers have inherently different objectives.  Sellers want the highest price and buyers want to pay the least.  Sellers want the terms of the contract in their favor and the buyers want them to favor them.  Buyers want lots of contingencies to let them out of the contract and sellers want the fewest possible contingencies.  Sellers want the most earnest money and buyers want to put up the least possible.

Agents are skilled at negotiation not only because of training but also experience.  Sellers' experience is usually limited to personal transactions separated by years in frequency.   Agents see multiple transactions in their daily business and can guide people through difficult areas.

Not responding to offers in a timely manner

Normally, an offer can be withdrawn, at any time, up until the point that it is accepted.   The expression a bird in the hand is worth two in the bush reminds us that the offer you have is real and the ones in the bush, may never come to fruition.

A common situation occurs when there is large amount of activity on the home and an offer comes in quickly.  Instead of negotiating on that offer, the sellers wait to see if any better ones are received.  By waiting, the seller runs the risk of the buyer changing their mind.

Alternatively, in the same situation described, the seller may decide to put the home on the market on Saturday morning and let prospective buyers know that they will be deciding on all offers received over the weekend on Sunday evening.

Your agent is a valuable part of selling a home who can offer advice, bring perspective to the transaction, and suggest different ways to help you achieve your goals.  Once you have the right agent, everything else will start to fall into place.

A Lesson from a Pro

A well-known professional home stager, recently, decided to sell the 4,000+ square foot home which she lived in with her husband.  It was certainly well maintained and by most standards, could have gone on the market immediately.  However, she still went through a full staging effort before she listed the home.

The work included painting inside and out especially, changing the kitchen cabinets from gray to white.  The carpet was replaced along with a few dated light fixtures.  They stained the fence and added minor landscaping to make it look fresh and inviting.  They removed personal items from the home that might be distracting and replaced some furniture that was too large and might have limited a buyer's imagination.

The home looked, smelled, and was clean.  It had great drive-up appeal.  Each room looked like it belonged in a magazine and the professional photos let potential buyers see the home before they visited it in person.  When the home did come on the market, it sold in five days, above list price, with multiple offers, and for a considerably higher sales price than previous comparable sales had indicated it would.

The lesson to be learned is that even if a home is in good condition, taking the time to go through the steps to make it look its best will generate the kind of results that every seller hopes for when selling their home: the highest possible price, in the shortest time with the least amount of inconvenience.