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Collin County Housing Market Approaching Balance; Still Better to Be a Seller

The Collin County Association of Realtors (CCAR) reports that the real estate market continues to favor sellers, but if trends continue, North Texas may soon find itself in a more balanced market. Over the past 12 months, median sales price has increased 1.5 percent to $301,500, which is 6 percent less of an increase than the year prior.

Simultaneously last month, the real estate market experienced 15 percent more homes for sale as compared to October 2017, supplying the market with 3.2 months of inventory. A market is considered balanced when it has six months of home inventory, a seller’s market if it has less, and a buyer’s market if it has a surplus above six months of inventory.

“It is important to remember, despite an increase in home inventory, those homes are still selling, and for more money than the year before,” says CCAR President Melissa Hailey. “It is still a great time to be a seller, Collin County is still experiencing growth, and buyers are excited to buy.”

The CCAR Pulse, which delves into the real estate markets of 37 local communities, supports Hailey’s thoughts, projecting that year-to-date closed sales have increased by 9.4 percent.

For the buyer, Hailey has encouraging news, “You are less likely to find yourself in a bidding war, and sellers are open to reviewing comps and setting a competitive listing price.”

On average, buyers paid 95.4 percent of the original list price of a home in October and homes stayed on the market an average of 49 days. The most popular segment of homes among buyers purchasing in October were those priced from $300,000-$499,999.

Last month, the housing affordability index declined 14.8% compared to the same time last year, hitting its lowest point in 2018. In addition, median household income was only 98 percent of what is necessary to qualify for the median-priced home under prevailing interest rates.

While many are anxious to see if the market continues to trend towards balance, the month of October gave both buyers and sellers reason to smile.

What Starbucks Holiday Cups Mean to You

Starbucks has a new seasonal cup out, and that means something major for you. It’s time to plan and execute your winning winter marketing strategy.

Need some fresh ideas? We have compiled a list of fun and effective ways to reach your clients and make your name one they will remember all the way to warmer months.

Seven Fun and Effective Holiday Marketing Strategies

Provide your clients with winterization tips and tricks

It is always a good idea to help clients protect one of their largest investments. Provide them with simple checklist of winterization basics and set them up for success. To deliver extra value to your clients, consider working with a local gutter cleaning company or other service provider to create a promo code for special savings.

Take care of their holiday photo

Hire a local photographer to come to your office and set-up a festive back drop. Invite all your clients to come by and have their family photo taken free of charge. Your clients will be so thankful to you for organizing a traditionally expensive and overwhelming task on their behalf that they will be bragging to everyone about their awesome REALTOR®.

Create a calendar of local holiday events

Remind your clients of why it is awesome to live in their town. Research your town’s unique holiday markets, festive parades, and family-friendly events to craft an easy to read calendar they can reference all season long.

Provide year-end review stats

Provide an approachable and informative year-end market review that shows off your industry knowledge and reminds your clients why they trust you with their business. Bonus: If your client purchased a home during the year, be their hero by proactively providing them with their settlement statement for their upcoming taxes.

Create a pumpkin pie tradition

One successful agent mails reminder cards to all his clients November 5, reminding them to come by his office the Wednesday prior to Thanksgiving to pick-up their pumpkin pie. Annually, he gets to see his clients, they never stress about making a pie for Thanksgiving, and they brag about their awesome REALTOR® while consuming pie the following day.

Host a toy drive or canned food drive

Partner together with your clients to help those less fortunate this holiday season. Create your own toy drive, or become a collection site for the Care for Kids Drive by picking up a decorated collection box at CCAR.

Get a new certification or designation

These courses don’t just mean extra letters at the end of your name, they mean more value for your clients. Take initiative this season to earn a new certification or designation, and then write a newsletter to your clients to let them know why you decided to complete the program.

Once you have found your unique approach to reaching clients during the holiday season, set an annual reminder on your calendar so you never forget your holiday marketing tradition. Quickly you will become part of your client’s seasonal traditions and their forever REALTOR®.

Giving Thanks: An Optimistic Overview of Market Conditions

By Alexandra Swan (NMLS 117371), Willow Bend Mortgage, and member of CCAR’s Realtor/Lender Committee

Give thanks!

Here in DFW, we in the real estate community (and all related industries) have a lot to celebrate this Thanksgiving season. And while a cooling market and rising interest rates may seem to some like the beginning of the apocalypse, those of us involved in CCAR’s REALTOR®/Lender Committee who have been around a few years want to remind everyone of a few of the many blessings we can count this year at the Thanksgiving table.

All statistics come from the Dallas Morning News, October 18, 2018.

  1. Statewide, sales are slowing as the market cools, but DFW still saw the largest number of home resales year over year from third quarter 2017 to third quarter 2018, with the total number of resales at 27,660 homes. The next closest market for number of houses sold was Houston at 24,028.
  2. In DFW, prices are up 3.9% year over year. The median resale price in DFW is currently $265,034.00.
  3. Although price appreciation is now slowing, median home values have risen more than 40% over the past five years, which means that many North Texas residents continue to enjoy strong equity in their homes—a significant advantage for move-up buyers wishing to sell a current property.
  4. DFW enjoyed the largest inventory increase of any of the major metros, up 14.5% from the third quarter of 2017.
  5. The average number of days on the market for a house is now 37—just one day more than the third quarter of 2017.
  6. The average number of months of inventory is now three—up from 2.6% in the third quarter of 2017. More inventory makes it easier for buyers to find the perfect home without getting crushed in a bidding war or consistently and repeatedly losing potential homes to cash offers.
  7. Interest rates are still amazingly low. Yes, you read that correctly. Twenty years ago, when some of us began our careers, 8.5% on a 30-year fixed rate loan was a good rate. Rates in the low 7% range triggered a sea of refinances in the early 2000’s. When rates fell to the mid 5’s after 9/11, consumers lined up to take advantage of the savings they could enjoy by reducing their interest rates and payments. Now, 17 years later, we have seen shockingly low interest rates for so long that we have forgotten that a 30-year fixed rate mortgage in the 3% range is not a reflection of normal market conditions. When we examine the past few decades of history, we see that interest rates are still very low, and housing remains affordable—especially as compared to other major U.S. markets.
  8. The overall economy remains strong in the third quarter of 2018, which is a good indicator for the continued health of the real estate market.

Author Andy Andrews states that perspective is the only thing in life that can change the outcome of a situation without changing any of the facts. Right now, rates are rising and an on-fire market is slowing down—compared to the last few years. By applying some perspective to the true state of our housing market, though, we can appreciate that our collective glasses are much more than half-full. We are in one of the nation’s top real estate markets, and our housing industry remains strong and viable.  We have much to be thankful for.

Happy Thanksgiving, from your REALTOR®/Lender Committee.

Phased Inspections: A Crucial Step in the Purchase of a New Home Build

By Lee Warren, Prospect Inspectors, Inc. (License #8411), and member of CCAR’s Affiliate Committee

It has become obvious in the last few years that the DFW Metroplex is growing in vast numbers. With this substantial growth, there is also the inevitable demand for new houses. Many people have the perception that new homes have no deficiencies. Many builders will tell you that they do their own inspections, they hire third party inspectors, and that there are the city inspectors to ensure that the house is built correctly. However, even with these three layers of inspections, one thing is absolutely consistent about them: Not one of them work for the buyer of the home.

It is vital for a buyer of a new home to have an inspection performed on that home. It is one of the largest purchases that one will make in their lifetime. Many people may simply get an inspection done when the house is complete. However, the best time to start having the house inspected is when they first start on the lot.

Many licensed professional inspectors offer “phased inspection” services. This means that they will inspect the property from the time they start moving the dirt, right up until it is completed. Keep in mind that this is the only time that you, as a buyer, will know what is getting installed before the foundation is poured, and before the drywall is installed. Contact a CCAR inspector to determine if they perform phased inspections and find out the benefits that a phased inspection can bring to your client with their purchase.

Keep in mind that some builders have certain requirements of inspectors before they will allow them to perform inspections on the home. Some of these requirements can be excessive, and this can lead some to believe that this may be an effort to prevent the inspection of the home. Many inspectors will not inspect homes by certain builders because of these excessive requirements.  Please ensure that you have a thorough conversation with a builder prior to having your client sign a contract with them. If the builder states that they have no extra requirements for an inspection, make sure that you get it in writing so that they cannot later impose this roadblock when your client’s earnest money is on the hook.

Know Your Financing Options/Outcomes for Taking Cash Out of an Existing Property

By Tracy Walden (NMLS 1048123), Great Western Home Loans, and Member, CCAR’s REALTOR®/Lender Committee

There are so many reasons for getting a cash-out refinance and many different types of loans. Reasons to get a cash-out might include:

  • Adding a pool or doing some home improvements.
  • Fixing up a home prior to selling it and taking out a loan for the improvements.
  • Using some of the equity in the current home to pay-off a high interest credit card.
  • Tapping into the existing home’s equity for a down payment to use on the new home. This often occurs so a borrower can close before he/she sells their current home and then pay-off that loan as soon as they sell the current home.

There are several options to accomplish each one of the scenarios above. However, CCAR’s REALTOR®/Lender Committee reminds you to have your clients find a trustworthy lender and to share what they need the loan for and what their ultimate plans are for that loan. Sometimes, there are options that are quicker with much less to pay in fees that can accomplish the same purpose as a more expensive refinance. It is best to be educated in all options prior to making that decision.

Many people are not aware that when you pay-off a first lien on a home after just a few months of originating it, the bank, and sometimes loan officer, can be hit with a large penalty. The deed of trust states that the borrower plans to live in the house for a year after closing. Although we understand that life changes for people, the expectation is that, at the time of closing, the borrower does expect to live in that house for at least 12 months. For this reason, it is very important for you to disclose to your loan originator any plans to sell the house or pay-off the mortgage within the first year.

The following scenario is a common example of a cash-out refinance used in conjunction with a home sale: Your client needs to fix-up their home before they put it on the market to sell it.  They have heard of getting a cash out refinance, so they call the bank and fill out the application for the cash out refi. The house isn’t listed, and they never mention to the lender that they plan on selling the home soon. The loan closes, and they get their cash. They do the improvements and list the house. It sells quickly, and they buy a new home at the same time.

In the scenario above, if your client had talked to the lender and asked him/her to walk them through all of the options and had been open about their end plan, the lender could have also shared some options like a home equity second lien, home improvement loan, or HELOC. Each of these options have minimal fees and usually close a lot faster than a primary cash-out refinance.

Refinances are not cheap and usually cost more in fees, and when the loan is paid off very quickly, the amount of the fees over the life of the loan are typically not recovered. Not only does the cash-out refinance cost the borrower unnecessary fees, but the lender will be hit with a huge penalty when the new loan is paid-off through the sale of the property. Since these losses are normally passed onto the individual loan originator, he/she wants to make sure that your buyer is in a loan type that is going to make the most sense for all parties.

CCAR’s REALTOR®/Lender Committees recommends that you ask your client to discuss his/her options with your trustworthy lender partner. Even if this isn’t a loan that your lender partner can originate (like a HELOC), they will be able to help the client know what his/her options are and connect them with someone who can help.

For these and other questions about lending, contact CCAR’s REALTOR®/Lender Committee at RealtorLender@ccar.net. And, if you’d like to join us, the REALTOR®/Lender Committee meets the second Tuesday of every month after the Plano Business Development Meeting (approximately 1 p.m.) in the CCAR Banquet Room.

Bank Statement Loans and How They Benefit Your Clientele

By Dawn Ferreiro (NMLS 514152), Service First Mortgage and Member, CCAR’s REALTOR®/Lender Committee

One of the most common reasons that self-employed borrowers are unable to obtain mortgage financing is due to the nature of their tax returns, and specifically how much they are able to write-off on their return in relation to their reported profits. Currently, the Government-sponsored Enterprises, or GSE’s (Federal National Mortgage Association or Fannie Mae and Federal Home Loan Mortgage Corporation or Freddie Mac), along with the Federal Housing Administration (FHA) require that lenders underwrite a self-employed borrower’s income utilizing the net income on their return/returns as opposed to the gross income. REALTORS®, by the very nature of their own employment, are all too familiar with this scenario and it remains a common frustration for the self-employed individual.

Thankfully, we are now seeing a rise in the market place for Bank Statement Loans. These products allow us, as Mortgage Professionals, to qualify buyers without the use of W-2’s or tax returns. Borrowers who have been self-employed for a minimum of two years will be allowed to provide their bank statements in lieu of their tax return (bank statements may be personal statements, business statements or co-mingled statements, however certain caveats do apply in each of these scenarios). There is certainly a well-deserved place in the market for these types of products, as there are currently an estimated 15-16 million self-employed individuals in the United States. Projections indicate that 27 million Americans are expected to leave full-time jobs from now through 2020, bringing the total number of self-employed to 42 million.

That being said, there are a few things to bear in mind when it comes to these loans. First, it is important to note that the borrower is responsible for providing some type of accounting of the expenses incurred by their business. The following options are allowable:

  1. A Profit and Loss Statement prepared by the borrower’s CPA
  2. A Profit and Loss Statement prepared by the borrower
  3. An Expense Statement from a tax professional in the form of a letter outlining the borrower’s average expense percentage over a specific timeframe.

In addition, deposit and expense patterns must be reasonable for the type of business. If any single deposit exceeds 75% of the monthly average deposit balance, it will have to be sourced.

While these loans are non-QM (Qualified Mortgage) and Non-Agency (agency being FNMA, FHLMC, or FHA), that does not necessarily mean that they are higher risk. The loans are ATR compliant, meaning they fall under the “Ability to Repay” rule of Dodd Frank, in which creditors are required to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling. And, most borrowers with these loans will actually have good or excellent credit scores.

The typical profile of these loans purchased in Q2 of 2018 are as follows:

  • 65% loan-to-value (35% down payment or 35% equity in the home for refinancing)
  • 36% debt-to-income ratio (conventional loan products allow up to 50% in some cases)
  • 699 FICO score
  • $518,483 loan amount

With this information in mind, we certainly recommend reviewing your client database to identify those clients who were unable to purchase a home due to their self-employed status combined with a low net income reported on their return, to see if this exciting new program might be of benefit to them!

For these and other questions about lending, contact CCAR’s REALTOR®/Lender Committee at RealtorLender@ccar.net. And, if you’d like to join us, the REALTOR®/Lender Committee meets the second Tuesday of every month after the Plano Business Development Meeting (approximately 1 p.m.) in the CCAR Banquet Room.

How to Close Smoothly During Peak Purchase Season

By Jake Perry (NMLS #231682), Fairway Independent Mortgage Corporation and Member, CCAR’s REALTOR®/Lender Committee

The time between May and September is typically the busiest time of year for Americans buying and selling homes. Some mortgage companies experience delays in underwriting that can lead to delays in loans closing. Even the best mortgage companies must closely manage and adhere to the timelines to avoid these types of delays.

How can REALTORS® help their lending partners ensure that timelines are met, delays are avoided, and ultimately customers are happy? The REALTOR®/Lender Committee has a few useful tips for CCAR REALTOR® members.

We recommend qualifying your borrowers as early as possible in the process. Sometimes, clients believe they can wait until they are actually ready to start making offers. However, we do not recommend waiting to qualify. Too often what the borrower believes about their ability to qualify, and the reality are very different. For this reason, we recommend having borrowers qualify sooner rather than later. A good rule of thumb is 120 days from the time a borrower is ready to go search is when they should speak to a lender and qualify. Credit reports are usually good for approximately 90-120 days. This time-frame allows lenders and borrowers to plan for delays.

REALTORS® should encourage borrowers to send their paperwork quickly. Mortgage companies are using technology to reduce paperwork and times, but both lenders and REALTORS® should prepare borrowers for documents related to income, assets, and credit to be sent to mortgage companies right away. Many lenders use various technologies to securely receive these types of documents. Borrowers need to be mentally prepared to send documents completely and urgently.

The property inspection and appraisal are important parts of the home purchase process. Many REALTORS® consider it a best practice to order inspection and appraisal at time of contract execution. Sometimes, REALTORS® prefer to receive the inspection before appraisal is ordered, as it can be a factor in repair negotiations. All parties should be aware that a delayed appraisal could lead to a delay in closing. In the summer months, the average turnaround time for appraisals is 6-8 days. In addition, the purchase contract has a box for CSS access to be checked. This box allows the appraiser to schedule the appraisal viewing.

The timelines required by TRID are more important than ever. Most mortgage companies require a loan approval prior to the Closing Disclosure issued, while some lenders require Clear to Close/Final Approval. Other lenders have other specific conditions beyond approval and prior to CTC that must be met. All lenders must send a Closing Disclosure to be signed three days prior to loan consummation. Business days (including Saturdays) count towards the three-day requirement. Regardless of the various requirements by lenders, you must work with a lender that has a good system in place to prohibit delays.

Finally, communication and preparation are imperative for a successful transaction for both REALTORS® and lenders. If problems arise, which they often do, REALTORS® and lenders should communicate with each other. For example, if delays occur due to repair negotiation, the REALTOR® must be prepared and open to a delay with the closing date. Many transaction milestones cannot occur until all parties have agreed to move forward, so there is a resulting impact to lenders. Although repair negotiations do not always lead to closing delays, it is often the case that REALTORS® need to communicate the possibility of a delay.

For these and other questions about lending, contact CCAR’s REALTOR®/Lender Committee at RealtorLender@ccar.net. And, if you’d like to join us, the REALTOR®/Lender Committee meets the second Tuesday of every month after the Plano Business Development Meeting (approximately 1 p.m.) in the CCAR Banquet Room.

What is a Residential Service Contract (Home Warranty)?

By Howard Zimmerman, Dallas Area Rep – Choice Home Warranty and Member – CCAR’s Affiliate Committee

What is a Residential Service Contract (home warranty)?
A Residential Service Contract (RSC) is a service policy that offers to repair or replace the major mechanical systems and appliances in a home. A seller can protect their home with a policy while their house is listed and a contract can also be offered with the sale of the home to the buyer.

What are RSC’s designed to do?
Their function is to reduce the policyholders’ repair and/or replacement costs of failed, covered mechanical items in their home.

How do RSC’s work?
Homeowners can either call the warranty company to place a claim or go online to do so when a problem occurs. The company will then notify a licensed and insured third-party contractor
to contact the homeowner to set an appointment.

After the contractor/technician diagnoses the cause of the failure, he/she will contact the warranty claims department with his/her findings. The claims department will then apply the technician’s diagnosis over the contract terms to determine if the claim will be declined or approved. When the claim is approved, the chosen level of coverage will determine the non-covered and/or out-of-pocket expense for the claim. As you can see, the technician’s diagnosis is a critical part of the claims process.

As a whole, RSC’s do not provide coverage for:

  • Commercial properties, residential properties converted into a business, or commercial grade appliances.
  • Items that are not stated in the contract as a covered item.
  • Upgrade of existing covered items (i.e. changing from a 40 gallon to a 50 gallon water heater).
  • Items that do not have a mechanical failure.
  • Items that fail due to a manufacturer defect.
  • Design flaws and structural issues.
  • HVAC systems that are undersized for the home.
  • Reimbursement to a homeowner for services performed without approval.
  • Known, pre-existing conditions.

Why should REALTORS® tell sellers and buyers about RSC’s?
Disclosure is one of the fiduciary duties of a licensed Real Estate professional. REALTORS® are required to protect their clients from foreseeable risks by recommending they seek expert assistance for services that are outside the scope of the REALTOR®’s expertise. Making your clients aware that home warranty plans are available takes care of many foreseeable and unforeseeable risks.

Disclosure about RSC’s greatly reduces the risk that Agents or their Broker will be held liable for subsequent mechanical failures, should the client decide not to obtain a warranty.

“Do’s and Don’ts” of RSC’s:

  • Do recommend that your client have a licensed HVAC company perform a thorough inspection of the a/c system during the home inspection.
  • Don’t solely rely on the home inspection. Since most inspectors are not licensed HVAC technicians, plumbers, or electricians they are limited by law to performing visual inspections.
  • Do call for quotes on homes that are greater than five thousand square feet.
  • Don’t assume the other agent will order the policy.
  • Do give your client a copy of the contract and tell them to read it. It has exclusions and limits of liability like any other contract.
  • Do have your client check the “decline coverage” box if they choose not to purchase a residential service contract and keep this form in your file.
  • Do show and highlight the company’s phone number and website for placing claims.
  • Do tell your clients about the many benefits of residential service contracts.

Are Student Loans Threatening the Goal of Home Ownership?

By Melissa Condensa (NMLS# 1149324), Producing Branch Manager – Guild Mortgage and Member – CCAR’s Affiliate Committee

Inventory is tight and interest rates are going up, but could student loan debt be one of the biggest threats to home ownership for millennials?  As our news feeds are filled with graduation pictures, it is worth taking a look at the amount of student loan debt that many young people are graduating with and the impact it can have on their ability to buy a home of their own.

The Wall Street Journal recently ran a story about the number of students who will graduate with over $1 million in student loan debt. The number of students with over $1 million in student loans for 2018 is estimated at 101, up from just 14 five years ago. That is clearly an extreme, but the average student graduates with $17,000 in student debt, and many are graduating with more debt than they will ever be able to pay off.

One reason people might never be able to pay off their debt is the program called Income Based Repayment. This repayment option allows people to make a small payment that is commensurate with their income. This payment is usually lower than an interest only payment, which results in a negatively amortizing loan. The lending institution wants their debt repaid, so the remaining unpaid interest is added onto the balance of the loan. While this makes the monthly debt more manageable, it also means the balance continues to grow each month.

How can student loans affect a person’s ability to purchase a home? First, there are potential buyers who will simply sit on the sidelines because they do not believe that they can afford to purchase a home due to their student loan debt. This may or may not be true, so it is always a good idea to have them meet with a loan officer to determine whether they can qualify.

There are also people who believe they can afford to buy a home, but in reality cannot because of their student loan payments. The ones most often impacted are people who are on an Income Based Repayment plan or whose loans are deferred. Most loan programs will not allow the payments on deferred student loans to be excluded from the debt to income calculation, and FHA for example, will not accept an Income Based Repayment plan for qualifying purposes. FHA requires that the lender use 1% of the outstanding loan balance, or the verified lowest fully amortizing payment to qualify the borrower to ensure the borrower can afford both their home and their student loans if they ever want to pay the student loans off.

Another major impact to someone’s ability to purchase a home are delinquent student loans. Potential homebuyers whose student loans are deferred, often allow them to become delinquent when they come out of deferment. Borrowers either do not realize, or are in denial about the fact that they need to start making payments or need to renew the deferral. Payment history makes up 30% of a credit score, so someone suddenly being 30, 60, 90 or more days delinquent on multiple student loans will see a dramatic decrease in their credit scores and limit someone’s ability to purchase a home.

There’s no arguing that a college education can set someone on the course for success in life, or that owning a home is a tremendous driver of wealth. We all need to find ways to help people manage both their debt and become homeowners. What can we do to facilitate both goals? First, let’s encourage young people not to borrow more than they absolutely need to borrow. Also, encourage everyone to do a cost benefit analysis on the degree they are earning and the amount they are going to have to spend to get it. Once they are out of school, we need to help them realize there are things they can do to ensure they can become homeowners. Rent adds up, so regardless of their situation, we should encourage young people to explore their options for home ownership.

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.