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TREC Form 49.0: What You and Your Buyer Need to Know

By Alexandra Swann, Vice-Chair – CCAR’s REALTOR®/Lender Committee

On February 12, TREC introduced a new form to deal with the issue of buyer’s right to terminate—or ability to waive the right to terminate—when an appraisal comes in low. In rapidly appreciating markets, such as ours, appraisals can’t always keep up with housing prices. In multiple-offer situations, buyers often try to distinguish themselves by agreeing to pay over the appraised value of the house. For a while, we saw a lot of contracts with verbiage in the Special Provisions section of the contract essentially stating that the buyer agreed to pay a certain dollar amount over the appraised value. TREC has disallowed that practice, but to deal with the issue they have introduced TREC form 49.0 which clearly lays out the buyer’s rights and options for termination due to a low appraisal.

First, the new form is to be used in connection with the Third-Party Financing Addendum Paragraph B2. This is important because loan terms change when property appraisals come in low because the mortgage loan is based on the LESSER of the sales price or the appraisal. Form 49.0 amends the right to terminate provided in B2 as follows.

Option 1:
The borrower’s right to terminate, if the property does not appraise and the lender reduces the loan amount, is completely waived. For example, if the buyer signs a contract for a sales price of $300,000 and the house appraises for only $280,000, the buyer is still committed to purchase the home for $300,000. If the original loan were based off 80% loan-to-value, the original minimum down payment would have been 20% of $300,000 for a total of $60,000. However, since the appraisal is based on the LESSER of the appraised value or the sales price, the buyer would now have a minimum down payment of 20% of the $280,000 (appraised value) which equals $56,000. In addition, the buyer would need to bring the $20,000 difference to closing, making the total minimum down payment $76,000.

Option 2:
The borrower’s right to terminate, if the property does not appraise and the lender reduces the loan amount, is partially waived. The buyer can designate an amount that he/she will accept for the appraised value and if the appraisal comes in for that amount or higher, the right to terminate, based on the appraisal, is waived. For example, the buyer signs a contract for $300,000, but in Option 2 he/she agrees to waive the right to terminate if the house appraises for $290,000 or above. If the home appraises for less than $290,000 he/she can terminate. If the buyer were applying for 80% loan-to-value financing, based off a sales price of $300,000, the minimum down payment would be $60,000. If the home appraised for $290,000 the buyer would need to put down $58,000 (20% of the appraised value) plus the $10,000 shortage in value. The buyer could also opt to change the financing to say 10% down. In that case the minimum down payment would be $29,000 (10% of appraised value). The buyer would still need to bring the additional $10,000 to closing so the total minimum down payment now becomes $39,000.

Option 3:
The borrower is granted the right to terminate if the appraisal comes in below sales price. This doesn’t require the buyer to terminate, but allows the buyer to terminate or negotiate. The buyer could still pay the difference, seller could lower the sales price, or they could agree to meet somewhere in between.

For many buyers who are selling a home and moving up, paying an additional $20,000 or $30,000 to secure the right home may be feasible and well worth the extra cash out of pocket. For other buyers, especially first-time buyers, even an extra $2,000 or $3,000 may be a deal-killer. The secret to successfully navigating these various options is going to include candid discussions about financing with your buyer’s lender.

First, buyers need to understand that they may have to bring in extra cash, should the home not appraise for the sales price. They need to be prepared to provide their loan originator with proof of all cash assets. Realtors will need to be prepared to ask the buyer’s loan originator if he/she can afford to bring in extra cash to closing and if so, how much.

Before committing a buyer to an appraised value in Option 2, the REALTOR® will need to make sure that the buyer has a fee worksheet from the loan originator detailing how much cash is needed to close if the appraisal comes in low. Seeing total figures in writing, including closing costs, helps buyers understand more clearly what is required of them. A REALTOR® will also want to make sure that the loan originator has verified enough cash to close from assets that are available and liquid. This is especially critical if the buyer is purchasing an investment property. Investors will be required to document their funds needed for closing and, in addition, will need to document reserve funds. Any changes to the sales price or appraised value may require recalculation of the reserves to make sure that the buyer can still qualify.

Second, buyers need to understand ALL of their financing options. A buyer who is determined to put 20% down to avoid MI may need to rethink that strategy. To win a bid on the right house in a hot neighborhood, he/she may have to be willing to pay more than the appraised value, which simply may not leave enough cash for a 20% down payment. This is not terrible news; MI rates for well-qualified conventional buyers with high credit scores are extremely affordable now. The buyer needs to work with the loan originator to review options with MI and a lower down payment. With a little education, the buyer may find that an extra $50 a month in MI is all it takes to make the right home, in the right neighborhood, a reality.

The Texas Association of REALTOR® has an excellent “online townhall” webinar prepared by an attorney to help you understand and complete FORM 49.0 and all the new TREC forms. You can access it here.

For questions about how Option 2 of Form 49.0 affects your buyer’s loan, and for all other lending questions, email CCAR’s REALTOR®/Lender Committee at realtor-lender@ccar.net.

What You Need to Know: JP Courts and Evictions

By Sunny Mattern, Property Manager – CCAR’s Property Management Committee

Did you know that each JP court could have different rules and guidelines when it comes to evictions? Do you know what precinct your rental property is in? Collin County has five precincts: Precinct 1 covers the McKinney, Melissa, and Anna areas; Precinct 2 covers Princeton, Blue Ridge, and Farmersville; Precinct 3 has two courts covering Allen, Lucas, Plano, and Richardson; and Precinct 4 covers Frisco, Prosper, and Celina. You can look at a precinct map at www.collincountytx.gov.

Collin County now accepts civil filing electronically. In fact, at the Justice of the Peace in McKinney, if you intend to file in person, they provide a computer kiosk so you can then file electronically. The surrounding counties have not all adapted to filing electronically and may require some paperwork in person. Dallas County has five precincts, with five additional sub-precincts; please find the precinct map at www.dallascounty.org. Denton County has six precincts; the full map is available at www.dentoncounty.com. Tarrant County has eight precincts and the map can be found at www.tarrantcounty.com.

The fees to file eviction suits can also vary throughout the counties. Typically, the County Clerk’s filing fee is about $46 and the constable fee to serve the defendant court appearance notice is about $75 per person. If you have listed all parties to the lease on the Notice to Vacate, then you must pay the constable to serve that number of people with the court date. If you list the primary resident and “all occupants,” you can keep the filing/service fee to a minimum.

Some of the required documents for filing an eviction suit must be notarized. Such document is the Military Affidavit. The plaintiff in the suit must have knowledge of the defendant(s) military status. In addition, some County Clerks may want to see the written lease agreement and the Notice to Vacate that was given to the defendant(s) prior to filing.

After an eviction suit has been awarded to the plaintiff, the tenant has five days to appeal the judgement and/or move out. If the tenant does not abide by the court ruling, the landlord can then file for a Writ of Possession. This filing usually costs another $165 and allows the county sheriff/deputy to enforce the physical moving out of the tenants’ belongings. A good property manager will have current knowledge of the specific procedures and can help minimize the costs of getting a bad tenant out of your property.

Mortgage Abbreviations and Acronyms

By Scott Drescher (NMLS #168878), Highlands Residential Mortgage, LLC and Member, CCAR’s REALTOR®/Lender Committee

The mortgage industry is rife with abbreviations and acronyms. Some are obvious, but others are a little more esoteric. The REALTOR®/Lender Committee thought you might benefit from a short list of the most common or noteworthy. When the abbreviation is an acronym, we provide pronunciation in parentheses; when it is not an acronym, it will have no parenthetical following the abbreviation.

App:  Application – the form that an applicant uses to apply for a mortgage.

APR: Annual Percentage Rate – the total cost of the credit, expressed as a yearly rate. This is not the interest rate because the interest rate doesn’t include any other costs of obtaining the credit, which may include, for example PMI (see below) or MIP (see below).

ARM (arm): Adjustable Rate Mortgage – a mortgage that has a feature that allows the interest rate to rise or fall. It is not a “rising rate mortgage” as some people mistakenly believe. The rate is determined by adding a margin to an index.

CLTV: Combined-Loan-to-Value – a ratio of all of the mortgages on a property to the value of the property, which by definition is the lower of the sale price or actual appraised value.

CD:  Closing Disclosure – the form required by the government that must show the final figures for all of the terms of the purchase and mortgage.

CTC:  Clear to Close – three words everyone likes to hear that indicate full approval, the file has overcome all obstacles and the lender is ready to prepare closing documents.

DTI: Debt to Income (Ratio) – the ratio of a borrower’s monthly housing payment (PITI below and association dues) and minimum payment on all debt and child support/alimony to his gross income.

DU:  Desktop Underwriter – the automated underwriting engine provided to lenders by Fannie Mae for underwriting Fannie Mae-eligible mortgages. DU is also used for underwriting FHA mortgages.

FHA: Federal Housing Administration – the department of the federal Department of Housing and Urban Development that oversees the U.S. housing market. FHA insures the entire mortgage made for loans sold to Ginnie Mae (see GNMA below) by its approved lenders.

FHLMC (fred-ee mack):  Federal Home Loan Mortgage Corporation – Freddie Mac is the other of the two conventional enterprises created by Congress to increase access to mortgages.

FNMA (fan-ee may): Federal National Mortgage Association – Fannie Mae is one of two conventional enterprises created by Congress to increase access to mortgages.

FTHB: First Time Home Buyer – a home purchaser that has not had an ownership interest in a residence within the prior three years.

GFE: Good Faith Estimate – used to be the document that a lender was required to send an applicant within 3 business days of an application that showed the closing costs, prepaid items and rate lock terms. It has been replaced by the LE (see below).  One should never suggest a buyer get a GFE anymore.

GNMA (jin-ee may): Government National Mortgage Association – Ginnie Mae is the agency that actually guarantees the federally guaranteed mortgages insured or guaranteed to lenders:  VA, FHA and USDA (see below).

GSE:  Government Sponsored Enterprise – created by Congress to increase access to mortgages.

HELOC (hee-lok): Home Equity Line of Credit – a loan against a primary residence that generally is used to take cash out, although it could replace existing home debt. It is designed to borrow and pay back from time to time, like a credit card.

LIBOR (ly-bor): London Interbank Offered Rate – the most commonly used index for ARMs.

LE:  Loan Estimate – the replacement for both the GFE and Truth-in-Lending forms, requiring lenders disclose within three days of receiving a formal loan application the closing costs, prepaids, the interest rate and other information.

LP:  Loan Prospector – the automated underwriting engine developed by Freddie Mac for underwriting Freddie Mac eligible mortgages.  LP is also used for underwriting FHA mortgages.

MBS: Mortgage Backed Securities. These are the investment instruments that are bundled by Fannie Mae, Freddie Mac, and Ginnie Mae for sale on Wall Street.

LO: Loan Officer – the individual who takes the actual application for a mortgage. An LO may be a licensed mortgage banker or broker, or he can work for a depository institution, be registered but not be required to be licensed.

LPMI: Lender Paid Mortgage Insurance – private mortgage insurance paid by the lender instead of the borrower. This is accomplished by the lender increasing the mortgage interest rate.

LTV: Loan-to-Value – the ratio expressed as a percentage of the mortgage to the value, which is the lower of the purchase price or the appraised value (when purchasing) or simply the appraised value (when refinancing).

MIP: Mortgage Insurance Premium – fully insures against loss for a lender, similar to PMI (see below) but is required for FHA mortgages. With FHA mortgages there is an upfront MIP payment, that is usually financed, as well as a monthly payment.

N/O/O: Non-Owner Occupied – signifies that the mortgagor uses the mortgage for an investment property.

O/O: Owner Occupied – signifies that the mortgagor uses the mortgage for a primary residence.

PITI (pit-ee): Principal Interest Taxes and Insurance – the combined total of all of the housing expenses listed, paid on a monthly basis, including mortgage insurance.  When not clearly stated otherwise, PITI includes any homeowners association fees.

PMI: Private Mortgage Insurance – partially insures against loss for a lender, charged on conforming mortgages that are over 80% LTV (see above).

RESPA (res-pah): Real Estate Settlement Practices Act – the federal law that regulates the sale and purchase of residential real estate.

TIP (tip): Total Interest Percentage – the amount of all the interest if paid in full over the term of the mortgage without prepayment at any time divided by the original loan amount.

TLTV: Total Loan-to-Value – another name for CLTV (see above).

TRID (trid):  TILA/RESPA Integrated Disclosures – the rules that govern the disclosure of the LE and CD.

USDA RHS: United States Department of Agriculture/Rural Housing Services – a program for guaranteeing rural mortgages, guaranteed by the federal government.

VA: Veterans Administration – guarantees the top portion of the mortgage made for loans sold to Ginnie Mae (GNMA) by its approved lenders. However, VA mortgages are only available to members of the military, honorably discharged veterans of military service and the unremarried spouse of a member of the military who passed away as a result of service in the military.

VOD: Verification of Deposit – a form that sent to a bank/credit union/savings bank/investment company to verify the amount of funds in accounts and to provide an average balance over a specified, usually 60-day, period.

VOE: Verification of Employment – a form that is sent to an employer to verify income in all its forms (gross earnings, bonuses, commissions, etc.), hours worked, continuance expected and more. Many times a VOE will be done followed up verbally by the lender just prior to closing.

VOM: Verification of Mortgage – a form that is sent to a lender to verify the amount and timeliness of the payment of an existing mortgage. This is normally used when a mortgage is not being reported properly and for privately held mortgages that don’t report to the bureaus.

VOR: Verification of Rent—a form that is sent to an applicant’s landlord to verify the amount and timeliness of the payment of rent.

For these and other questions about lending, contact the REALTOR®/Lender Committee at RealtorLender@ccar.net.

Property Management and the Code of Ethics

By Sunny Mattern, Property Manager – CCAR’s Property Management Committee

Did you know that if you offer to manage property for a fee and don’t know anything about property management, you might be in violation of our Code of Ethics? You may already have a relationship with the investor or homeowner who wants to lease their property, but do you have the property management expertise to accept such a relationship? Does your Broker know and allow you to enter into property management contracts?

Fiduciary duty is a major part of a Property Manager’s job when dealing with security deposits, collection of rents, and offering placement fees. TREC and the Texas Property Code have specifically lined-out rules and regulations on how to deal with these monies. The number one disciplinary action taken against real estate agents is in regard to disputes over misappropriation of funds.

Integrity and competency are just as important. The rules and articles of the Property Code are always being amended and improved to better serve the public. If you, or your Broker, do not know the most current regulations, you could both be in trouble. TREC’s Broker-Lawyer Committee has just revised the most commonly used forms in leasing and property management. Do you know what revisions were made?

Property Management is a specialized section of real estate. Although your real estate license allows you to provide these services, you may need to check with your Broker before accepting such relationships. Many brokerages do not allow their sales agents to provide property management services. Any agent new to this type of transaction should do their due diligence and research before they begin. In addition, CCAR’s Property Management Committee is available to any REALTOR® to answer questions and provide expertise.

2017 in Review

Gifts That Keep On Giving, Version 2017

By Scott Drescher, Highlands Residential Mortgage and 2017 Chairman, CCAR’s REALTOR®/Lender Committee

2017 was a positive year, despite individual struggles that some of us may have endured. The CCAR REALTOR®/Lender Committee can point to improvements in the mortgage landscape practically every year, even those that were marred by over-regulation after the market crash. However, this year we received gifts, from Fannie Mae in particular, that will keep on giving throughout 2018, as well as some improvements in other parts of the industry. Setbacks? Sure, there are always a few setbacks, too, but the positives outweighed the negatives. In case you missed any, here are some of the ones we believe stood out.

At the beginning 2017 (and it seems soooooo long ago now), FHA was poised to lower the mortgage insurance premium for new mortgages, but it was quashed. That was a disappointing start to the year, but it turned out not to portend a bad year for home buyers.

Mid-year, Freddie Mac explicitly shut down 1% down payment mortgages that were the 3% down payment mortgages with lenders rebating 2% of the sale price to go toward the down payment. The problem for both agencies is that lenders were not following their guidelines, particularly when it came to not charging a higher rate to use premium pricing to pay for the rebate. Since lenders only net less than .60% (according to the 2016 report from Mortgage Bankers Association), it would mean that lenders who follow the rules would have to pay over three times the profit from other loans to fund the losses from just one, 1% loan – a bad idea for any business.

Qualifying buyers for North Texas’ ever higher sale prices is an ongoing challenge since prices began to rise after the recession. The Agencies (Fannie Mae and Freddie Mac) made it a little easier in 2017 in four ways. First and the most important by far, they raised the maximum debt ratio 50% for down payments less than 20%. Second, the Agencies both will allow one year’s tax return for self-employed borrowers when the borrowers have owned their business for at least five years. Third, non-mortgage debts paid by others will not be counted in the debt ratio of borrowers even if the payer is not a borrower on the debt. Fourth, Fannie Mae will allow more flexibility in using a lower payment for student loan payments than old way of using 1% of the balance that was calculated prior. These changes could all allow for substantially higher sale prices than before.

Another improvement that may occasionally create some headaches or even busted closings is the removal of liens and judgments from credit reports. This puts greater emphasis on the fraud guard reports lenders use because they are designed to pick up public records. Similarly, the title commitment may have them, too. Lenders who don’t order the reports early in the process are just asking for trouble.

As for double-edged swords, the news that the Agencies expanded appraisal-free mortgages to purchase loans could help avoid both value and condition potential problems. However, your REALTOR®/Lender Committee was quick to point out that it would preclude allowing a home buyer to renegotiate the purchase price due to a low appraisal (that he might have been counting on getting) or lender-required repairs (that he was hoping to require). The value of a REALTOR® as the option arises is never more evident than when a buyer needs the wise counsel regarding saving the appraisal fee or not.

In further automation upgrade news, Fannie Mae rolled out Day 1 Certainty. This allows lenders who use it to retrieve income and asset documentation from institutions who participate, eliminating the need for income and asset documentation that comply from being hunted down by buyers. Not only has this shortened the turn times in processing slightly, but it has also allowed for fewer questions and problems that arise when underwriters unintentionally see things that were better left unseen.

Probably the best news for REALTORS® in markets with rapid appreciation is that loan limits increase along with prices. For our area, the new conforming single family limit is $453,100, and the FHA single family limit is $386,400. This humble writer started in real estate when the conforming SFR limit was $191,250.

Of course, the biggest news of the year (testing to see whether anybody is really paying attention), was when Beyoncé and Jay-Z took out a $52 million mortgage to buy a house in 2017. As the highest paid celebrity couple, it’s unlikely they cannot afford the mortgage payment.  Although it is probably not a 30-year fixed, guessing at the payment using that as a guide puts the monthly at $263,476, but you should not have fear for the wealthy couple – they must have an interest-only adjustable rate mortgage because the payment was reported to be under $150,000 per month, making it much easier to pay, I’m quite sure.

Onward and upward, friends!

Melissa Hailey

Q & A with Melissa Hailey, 2018 CCAR President

Melissa Hailey, the founder of North Texas Top Team, REALTORS®, Inc., will be installed as the 2018 President of the Collin County Association of REALTORS® (CCAR) on Nov. 9, 2017. An active member of CCAR since 2006, Hailey has served as the Chairperson for several committees, and she currently instructs various educational classes. She chats with us about her introduction into the real estate industry, her history with CCAR, and the vision she has as the next President.

Q: Since becoming a member of CCAR, what roles have you held within the Association?

A: “I started attending the Wylie Business Development Meetings in 2006. After attending these meetings for a year, someone asked me if I would help schedule the topics/speakers for the next year. After serving as the Vice Chair and then the Chair the next year, I learned about other ways to get involved at CCAR. I have served as past-Chair of CCAR’s Wylie BDM, Technology Committee, and Budget & Finance Committee. I also attend the meetings of the  Professional Development Committee, Government Affairs Committee, and TREPAC Committee, but I have not served as the Chair of these committees.”

Q: What do you enjoy most about the work you do? 

A: “I truly love what I do. I love helping people and being paid to do so. Over the years, I have found that helping clients is fulfilling, but now that I am an Independent Broker, I find that helping my agents so that they can help their clients is even more rewarding. Additionally, I love teaching for TAR and CCAR. One of my passions is to raise the bar in real estate by teaching other REALTORS® to assist their clients and build their businesses.”

Q: What has been the most beneficial part of being a member and President-Elect, prior to fulfilling your upcoming role as President?

A: “As part of the Executive Team, I find that my involvement with, and being on the Board of Directors for, TAR and NAR has been very beneficial. I now have so many connections with REALTORS® from across the country that my referral network has grown tremendously. I have also learned so much about different ways that REALTOR® Associations function across the country. One of the most eye-opening things was learning about other MLS’s and understanding how blessed we are to be a part of NTREIS.”

Q: As the incoming President, what is your vision for CCAR, and what initiatives do you have lined-up to achieve those visions?

A: “I am very passionate about educating REALTORS®. One of the things we are working on is a partnership with other area associations to host some education classes focused on fair housing. Additionally, we have moved our Technology Committee to become a part of our Education Committee so that they can work together to bring additional technology classes to our members. Another thing that is important to me is that we are reaching all of our members, regardless of where they live and work. I want all of our members to have the educational opportunities they need, as well as other member services more readily available to them in their local communities.”

Q: What surprises you most about the local real estate industry?

A: “I don’t necessarily know that anything surprises me. One of the things I am most excited about is the fact that we have had such tremendous growth in our area. With all of the corporate relocation in the Collin County area and our immediate surrounding communities, the need for housing is great, and our members are here to assist people who are moving to our area. I think that this growth will somewhat insulate our area from any potential downturns in the real estate market across the rest of the country.”

Dish on MHailey

 

1. She has a thing for cars.

While she was in high school, Hailey raced cars every weekend at Texas Raceway Drag Races in Kennedale, Texas. While her need for speed has subsided today, there is one thing car-related still on her bucket list. “My dream car is a 1976 Corvette: classic white exterior and red leather interior with a T-Top,” she said.

2. Before she became a REALTOR®, she worked at a radio station (where she met her husband), attended over 400 concerts and rubbed elbows with noted artists including Dan Aykroyd, Brad Paisley, Clint Black, Willie Nelson, Ted Nugent, Blake Shelton, Sara Evans, Tanya Tucker, Gary Allen, and John Goodman.

“My first concert ever was the “Van Halen 1984” tour,” Hailey said. While she enjoyed working for a host of radio stations—99.5 The Wolf, 570 KLIF, 1310 The Ticket, and Hot 93.3FM, to be exact—and meeting renowned musicians, she also feared losing her job. “They were consolidating,” she explained.” There was a possibility that I could be laid-off, so I was considering what I might want to do in that event.” Her husband suggested getting a real estate license, and although she was hesitant as first, his confidence in her inspired her to do so.”I am so thankful that he convinced me to become a REALTOR®.  It is one of the best decisions I have ever made.”

3. She is always up for an adventure.

Besides her love for roller coasters and visiting theme parks, Hailey also enjoys traveling. “For the past 16 years, I have taken at least one vacation trip per year and never visited the same place twice,” she says. Among her most memorable occurred in the late 1990s, when she went to the observatory at the top of the World Trade Center.

bridge loan

The Advantages and Disadvantages of Bridge Loans

By Alexandra Swann, GenEquity Mortgage and Member, CCAR’s REALTOR®/Lender Committee

With the summer home buying season drawing to a close, more and more buyers and their agents inquire about bridge loans. Sellers faced with multiple offers do not want to take an offer with a contingency to sell an existing home, and buyers often do not want to be faced with making two house payments. A bridge loan sounds like a great alternative—and for the right buyer, it can be.

How does a bridge loan work?

The term “bridge loan” can mean a couple of different things in the industry, so when talking to a loan originator, you need to be specific on exactly what you want. A bridge loan is a type of financing that eliminates the need for a contingent offer, making it easier to win a competitive bid. Since there is no contingency, bridge financing can help with shorter closing times.

Types of Bridge Loans

There are currently two popular uses of the term “bridge loan,” as well as a new third type—each with its own advantages and disadvantages.

 Short-Term Home Equity Line of Credit

The first type of bridge loan is a short-term home equity line of credit against the equity in an existing home, which can then be used as the down payment on the new house. This is most common when the prospective buyer has a home with a lot of equity and a small first-lien balance or no balance at all. The new bridge loan is attached behind any existing first, and the buyer suddenly has access to the equity in the house.

Advantages:

This type of bridge loan can solve the problem of not having sufficient down payment because the funds to close on the new home are tied up in the current home. Home equity loans in Texas have no prepayment penalties, so when the house is sold, any first lien and the bridge loan are both paid in full. The only real expenses to the homeowner are any closing costs and the interest paid on the bridge loan during the months until the original primary sells. Also, the buyer is getting a permanent loan on the new primary immediately.

Disadvantages:

The buyer is making two house payments until the original home sells, which can deplete assets and strain income. In Texas, home equity loans are capped at 80% of the value of the property, so the borrower will not be able to access all of the equity. Most importantly, Texas cash-out loans are for primary residences only, so for a borrower to take out a home equity loan knowing that he/she is planning to immediately buy a new primary is dishonest.

Portfolio Loan

The second type of bridge loan is a portfolio loan which is offered by several of the smaller regional banks. In this type of loan, there is no dishonesty because the lender understands that the loan is for the purpose of purchasing a new house. The lender qualifies the borrower and then orders two appraisals—one on the current primary and one on the new purchase.

Advantages:

Like the home equity loan above, this type of bridge loan can solve the problem of not having sufficient down payment because the funds to close on the new home are tied up in the current home. It is set up to have no prepayment penalties; when the house is sold, any first lien and the bridge loan are both paid in full. As before, the only real expenses to the homeowner are any closing costs and the interest paid on the bridge loan during the months until the original primary sells. Furthermore, the buyer is getting a permanent loan on the new primary immediately.

Disadvantages:

As with a home equity loan, the buyer is making two house payments until the original home sells, which can deplete assets and strain income. Most lenders of this type of bridge loan also cap the loan at 80% of the value of the property, but in some cases, the lender may go as high as 90%. This is very rare, however. Regardless, the borrower will not be able to access all of the equity.

The New Bridge Loan: A Short-Term Loan on the New Primary

The new, third type of bridge loan is not really a bridge loan, but because it is being sold to REALTORS® as a bridge loan, the REALTOR®/Lender committee felt we should include it here.

With this loan, the lender assesses the equity in the current home as the future down payment on the new primary and then makes a short-term loan on the new primary at 100% of the purchase price. The borrower does not have any payments on the new home for a set period of time—usually six months—while he/she is waiting to sell the prior home. The borrower is responsible for six months of interest payments, but these are generally “rolled” into the costs for the prior home. So when that home sells, the bank is paid, the lien is released, and the current home is refinanced into a new, permanent, fixed-rate mortgage.

Advantages:

The advantages of this type of financing are obvious. The buyer is able to purchase a new home without first selling the former home, without the financial pressure of two house payments, and without having to qualify with two house payments.

Disadvantages:

If for any reason the borrower’s prior home does not sell during the period set by the bank, he/she is going to be making two house payments plus interest. This could be a huge issue for a borrower who really does not have the financial resources to make both payments. Although we are accustomed to a red-hot housing market in most of DFW, remember that we have buyers coming in from all parts of the country, and those housing markets may be much cooler than ours. If the house being sold has not been priced or marketed properly, the buyer with the bridge loan may find themselves in a financially disastrous situation. Another major concern is that the qualifying situation may change during the period between the home purchase and the refinance of the new home. There are no guarantees that the buyer will qualify for the refinance, and the terms after the initial period can be quite onerous. The last major issue is that the buyer is not locking in the rate and terms of the permanent mortgage when buying the new primary residence. If rates rise or values decline, which are not unprecedented, it could be terribly painful for the buyer at the time of the refinance.

Determining if Bridge Loan is a Good Option

Bridge loans are simply tools; they are not inherently good or bad. Like most mortgage products, they are highly appropriate for some buyers and extremely inappropriate for others. No borrower should ever take a bridge loan if he/she really cannot afford to make two payments. If the buyer really does not have strong cash reserves or the income to support two house payments, that buyer needs to sell his/her house before buying a new one. Better to miss out on the perfect home today than to buy that home and be unable to make the payments nine months later. It’s always better to be safe than sorry. 

For these and other questions about lending, contact the REALTOR®/Lender Committee at RealtorLender@ccar.net.

From Little House of Horror to Conceivable Contender

Anyone who has ever gone house hunting has encountered at least one of these in their search: A house of horror. If it isn’t written on their faces the moment they pull into the driveway, it will be by the time you turn the knob and invite potential buyers inside.

It is understandable if an undesirable home is being sought out by an investor skilled at transforming an ugly house into a profitable gem. The situation is also ideal for DIY enthusiasts who don’t mind rolling up their sleeves. Or, individuals who buy fixer uppers only to tear them down to acquire the land from which to build their dream house. Then, there are the rest of us—traditional buyers who prefer to walk into houses and envision how we can transform them with minor touches. We shouldn’t be tempted to strike a match, throw it, and run out.

If your seller places a buyer-repellant house on the market, we can only imagine what you, the REALTOR® in charge of selling that home, must contend with. The open houses are unfruitful, the ridiculous offers don’t even warrant a response, and yes, the excruciating wait and marketing efforts don’t yield the result you or the homeowners envision.

Hope, however, is not lost. Here are several simple solutions that the sellers can implement to sale their home faster and for a higher price tag.

Turn a once terrible reveal into a great deal.

Quick fixes like pressure washing the exterior of the house and landscaping the yard can make a property attractive to home buyers.
Quick fixes like pressure washing the exterior of the house and landscaping the yard can make a property attractive to home buyers.

It is one thing to not have enough bedrooms or bathrooms, a generous backyard, an updated kitchen, and the three-car garage that makes buying the house a deal breaker. However, it is another if the house in question meets all requirements but appears to be in a questionable state, even if nothing is structurally wrong with it.

Sometimes what a buyer can and cannot see causes red flags to emerge. Does the abundance of pet hair or pet smells have them concerned about the cleanliness and the air quality of the home? Are the dingy walls or orange carpeting drawing away from otherwise coveted features like coffered ceiling beams, crown moldings, or original hardwood floors? Does the sight of an overgrown jungle-like backyard and slanted storage shed have them envisioning weekend days spent slaving away just to access the space?

While the age of a home can explain stains and cracks a buyer sees, those details are oftentimes attributed to a lack of proper maintenance. It can be hard for the seller to see and think like the buyer. Since they are accustomed to their way of life, they might not notice the saturated scent of cigarette smoke that lingers on buyers’ clothes even after they emerged from the property hours prior. Although the seller fixed water damage, they might be oblivious to how potential buyers view visible stains and patches as out-of-pocket expenses they will accrue to remedy the situation.

When you meet with your seller to discuss placing the home on the market, be honest with them. Discuss what improvements they can make to not only get top value for their home, but also make someone walk in and fall in love with it so much they are tempted to buy it. They can avoid unnecessary scares with a few smart repairs. The wall patches, dull walls, and dated cabinetry can be livened with fresh paint. The gutters can easily be reattached. The shrubbery can be manicured for curb appeal. The low water pressure can be solved by a skilled plumber. The bathroom tiles can be caulked. If it helps, invite them to see other  comparables in their area to see how their house stacks up with one that is nicely presented.

Unclutter the clutter.

Sometimes, it isn’t the house itself that is the problem. As stable as a structure can be, buyers can get the illusion that something is amiss. They instantly chalk any imperfection with unforeseen problems that diminishes their interest in the house or results in a lowball offer. No one wants to feel as if they are standing in a construction site, a hoarder’s haven, or a childcare center gone awry.

Crowded kitchen counters and bathroom vanities tend to signal lack of storage space. This is also true for messy, overpacked closets and cluttered children’s room. Simply put, when a house is listed on the market, it shouldn’t look like it would have belonged in an episode of Clean House.

Time is a commodity, so it is understandable if your sellers are busy people. However, if they are motivated to sell the house, they should also be open to your suggestions. Suggest hiring a home staging professional who can help par down excess items or an experienced organizer who will transform their chaos into an organized system. If space is still an issue, the seller can pack up items not used on a daily basis and relocate any excess furniture into a storage unit while the home is on the market.

While bringing in professionals may be required in some situations, most homeowners would prefer to not spend an arm and a leg each time they turn around. More than likely, your seller will balk at the thought of spending any more money on a property they hope to relinquish themselves from soon. Motivate them with this obvious fact: They can sell faster and for a larger amount if the buyers don’t walk in immediately adding up what they must spend out-of-pocket to bring that property to their livable standards.

Approving Buyers Just Got Easier

By Jake Perry, Fairway Independent Mortgage Corporation and Member, CCAR’s REALTOR®/Lender Committee

Fannie Mae just made it easier to qualify borrowers by making it less challenging to exclude debts they are not paying. As many of you know, one of the most common problems lenders face is overcoming high debt to income ratios (DTI).

Along with credit, capacity as it relates to DTI very commonly causes a loan to not be approved. Capacity is defined by Freddie Mac as “Lenders look at your income, employment history, savings, and monthly debt payments, such as credit card charges and other financial obligations, to make sure that you have the means to take on a mortgage comfortably.”

Often, the cause of the high DTI is not even the borrower’s debt. It’s simply debt for which they cosigned for someone else.

How many of us have had clients that we could not approve because they co-signed for a car, a credit card, or a student loan? In a lot of cases, the buyers didn’t even co-sign; they were borrowers for their adult child or relatives, but they don’t make the payments. Good lenders ask detailed questions up front about these debt obligations. If a debt is reliably paid by somebody else, it seems only fair that a lender would ignore that debt. Until now, Fannie Mae required that the debt be counted unless it was co-signed, not when the debt did not include the third party on the debt.

Fannie Mae recently made changes to enable lenders to exclude debts that the borrower does not pay. This includes non-mortgage debts like installment loans, student loans, and some other monthly debt,- as defined by Fannie Mae.

Documentation must be provided that the debt has been paid by another party for the previous 12 months. The other party does not have to be obligated on the debt as it was in the past.

This change to DTI is a tremendous shift. It means that some of your buyers will have more opportunities to buy the house that they want. They no longer have to settle for a less expensive house that they really didn’t want or, in some cases, be a buyer instead of a renter.