What it’s Really Like to Get a Mortgage Completely Online

getting a mortgage online

Drew and April Olanoff had great jobs in Silicon Valley, but even they were discouraged by the house hunting process in the San Francisco Bay Area: all-cash offers, bidding wars, two-bedroom condos listed for $1.5 million. They quickly decided to move their search to Drew’s hometown of Philadelphia — and they conducted the whole process online, from settling on a home to nailing down a mortgage.

The Olanoffs are just two of a growing number of homeowners who obtain a mortgage completely online, uploading documents and e-signing forms with no in-person meetings required. Online direct lenders — that means companies like SoFi, Better Mortgage and Rocket Mortgage by Quicken Loans — typically eschew costs like origination and applications fees. And they focus on speedier processes, which can lead to quicker closing times compared with more traditional mortgages. (Disclosure: MagnifyMoney’s parent company, LendingTree, offers homebuyers an online tool they can use to compare quotes from mortgage lenders.)

These upstart players are pushing the mortgage industry to innovate and become more transparent, experts say. But, they add, a fully online experience isn’t for everyone — and online lenders may not necessarily offer a homeowner a better rate than a traditional lender would.

“I can’t even imagine going into an office, dropping off paperwork, seeing people, and not getting the house at the end of the day,”

In the Olanoffs’ case, they even selected their home unconventionally, at a distance. From the West Coast, they directed a ReMax real estate agent to visit about 10 homes, shoot video and upload the footage to YouTube. They chose their 1916-built South Philadelphia home based on these videos.

Then their agent directed them to GuaranteedRate, one of the largest mortgage lenders in the U.S., which offered them a fully online experience, with the ability to upload and digitally sign documents. The Olanoffs were approved for an Federal Housing Administration (FHA) loan for about $260,000 in July 2016, and closed on the home that September.

“It was way less stressful doing it online,” says Drew, 38, vice president of communications at venture equity firm Scaleworks.

“I can’t even imagine going into an office, dropping off paperwork, seeing people, and not getting the house at the end of the day,” he adds. “The process leading up to and bidding on a home is so stressful, it’s almost like we were automatically removed from the intensity of it by doing it online. And we knew if we got outbid, all of our paperwork would still be there ready to go, which is genius.”

That ease and transparency is attractive not only to smartphone-loving millennials, but to homebuyers of all ages who are tired of complex and confusing mortgage-application processes, says Keith Gumbinger, vice president of the independent consumer-loan site HSH.com.

“The push to online has been underway for years, and it’s finally coming to the forefront with consumers’ widespread adoption of technology,” Gumbinger says.
“The market has now grown into it, too. You don’t think about it as a homebuyer, but there are lots of backend processes and entities involved in a mortgage. The industry has worked to come up with standards and it’s finally gotten there.”

Here’s a look at three of the major online mortgage players, all of which are direct lenders and can complete 100 percent of the process online.

SoFi

SoFi’s mission and advantages: “SoFi’s target market is high-earner, not-rich-yet,” says Helen Huang, its senior director of product marketing. That reflects SoFi’s unique applicant-assessment philosophy: The company looks beyond the traditional factors like credit report and savings, taking into account the borrower’s earning potential.

SoFi gives a lot of weight to job history and career prospects. So a high-demand software engineer who has restricted stock units at Facebook and her choice of Silicon Valley jobs might be more attractive to SoFi, compared with the person with good money saved for a down payment. (It’s no surprise, then, that Huang says a “significant” portion of SoFi customers work in the technology industry.)

SoFi has another edge over traditional lenders: The company requires only a 10 percent down payment with no private mortgage insurance requirement. Most lenders require 20 percent down to skip over PMI. SoFi issues mortgages up to $3 million, and the company has originated $2.2 billion in mortgages since 2014.

SoFi is short for Social Finance — the company offers lots of other services, like student loan refinancing and wealth management — and it lives up to its name with its SoFi Members Facebook page. The group is extremely active, with SoFi customers frequently posting to solicit advice and tips from fellow borrowers or SoFi’s customer service team.

Potential cons: SoFi won’t originate loans below $100,000, so it’s not a good choice for customers in areas where real estate is relatively inexpensive. Borrowers must put down a minimum of 10 percent for new loans. And it takes 72 hours to receive a decision from SoFi, which — while quick — isn’t as speedy as some competitors.

SoFi mortgages also aren’t available nationwide. The company only originates mortgages in 29 states: Alabama, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Maryland, Minnesota, Montana, Nevada, New Jersey, New York, North Carolina, North Dakota, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, Washington, Wisconsin, Wyoming and Washington, D.C.

SoFi’s mortgage application, step by step

getting a sofi mortgage
Screenshot of SoFi mortgage application.

Get started: First, you’ll set up a SoFi account by entering your name, state of residence, email and a password. Next comes the “Basic Info” screen: your mailing address, phone number, date of birth, citizenship and current living situation.

Next is School Info, where you’ll fill out information about post-high-school degrees. (SoFi notes on the screen that a “college degree is not required to qualify for a mortgage. While education is not used in mortgage underwriting, this info helps SoFi better understand our members.”) Then it’s time to add Employment Info: your employer name, job title, start date and annual income. For now, you’ll do this just for your current employer, and at the bottom of the page, select your total years of professional work experience.

Mortgage eligibility: Here you’ll complete several questions about what you’re looking for: Do you need a mortgage for a new property, a refinance, a student loan cash-out refinance or a cash-out refinance? You’ll also enter information about where you are in the buying process, and information about your desired area or specific property. You can also add information on this screen about your marital status and whether you have a co-applicant. Check the box to grant SoFi the right to do a soft credit pull to preapprove you for a mortgage. Remember: A soft pull won’t harm your credit score.

Get your rate: Hopefully, the next screen will announce: “Congratulations! You’ve pre-qualified for a SoFi mortgage.” If so, you can calculate your loan amount by entering the home’s price and your down payment. Then you can choose loan terms: 30-year fixed, 15-year fixed, or adjustable rate. To move forward, click “continue with pre-approval.”

Next you’ll fill out employment information for any previous jobs you may have held in the past two years, and if you currently hold two or more jobs you’ll add that information too. Then itemize any non job-related income, like Social Security or rental properties, and finally add any assets you want SoFi to consider in your application (checking, savings, brokerage or retirement accounts; second homes; etc.) and click “continue.”

Get approved: Finish up by answering a series of yes-or-no “declarations,” like whether or not you’re involved in a lawsuit. Finally, add your Social Security number and consent to SoFi’s credit disclosure. The final screen will confirm that SoFi is reviewing your application, and it will ask you to upload income validation documents (two most recent years’ W-2s or the last two years’ year-end paystubs), as well as your two most recent paystubs. You’re done; SoFi says applicants can expect to receive their application decision within 72 hours.

Rocket Mortgage by Quicken Loans

Rocket’s mission and advantages: As the online lender arm of Quicken Loans, Rocket is like a startup backed by a long-established, well-known parent. The company is named for its speed (its 2016 Super Bowl ad used the now-defunct, controversial tagline “Push button, get mortgage”).

One of the reasons for that speed is a unique, refreshing lack of paperwork. Rocket pulls from private and public sources to automatically fill in information like employment history and income, as well as financial statements (from the “vast majority” of institutions) — drastically cutting down on the need for uploaded documents or line-by-line typing of information. It’s somewhat similar to how budgeting apps like Mint pull your financial data from several institutions at once.

“Whether it’s car rides or takeout, these days we expect everything to happen immediately with the push of a button,” says Regis Hadiaris, Rocket’s product lead. “The mortgage industry has to catch up to that.”

On average, 60 percent of people using Rocket are doing so on a mobile device, Hadiaris says. Rocket originated $7 billion in loans in its first year, and the company now has nearly two million user accounts. Unlike many of its competitors, Rocket originates loans in all 50 states.

Potential cons: While mortgage consultants are available to help, including via phone or online chat, Rocket is clearly designed more for customers who want a fully digitized experience.

Rocket’s application process isn’t quite as streamlined as some of its competitors. Once you move past the preapproval process, you’ll need to sign into Quicken Loans’ MyQL site to download the preapproval letter and complete any necessary tasks for a loan purchase.

Rocket Mortgage application, step by step

getting mortgage with rocket mortgage by quicken
Screenshot of Rocket Mortgage application.

Start by creating an account with your name, username and password. Then you’ll answer questions about your current situation: where you live now, when you started living there, and how much you pay in rent or mortgage. Next, provide information about the home you want to buy, or your desired location. Add information for anyone else who will be a co-signer on the loan, if applicable.

The next section is where Rocket’s automatic filling of information comes in. The system asks for assets and income, which you can choose to type in manually – or you can click “Find My Account” to add the data automatically. Quicken/Rocket connects with the majority of financial institutions, but double check to make sure everything is complete and accurate.

Below that, it’s a similar process for employment data and income: Either add it manually, or let Rocket fill it automatically. The company’s primary source for this employment information is third-party verifier The Work Number, and Hadiaris says it covers just over half of Americans – so again, this is one you’ll want to double check.

Finish up by answering government questions like whether you’re a U.S. citizen, and authorize a soft credit check by entering your birth date, Social Security number and phone number. A countdown clock pops up (“T-Minus 00:06 Seconds”) and then you’ll be sent to a screen with your mortgage options.

Mess around with loan terms and down payment percentages to get different choices, and Rocket will categorize them by lowers monthly payment, lowest upfront costs and balanced costs and payments. You’ll be directed to MyQL.com to download an your pre-approval letter, or to move forward to purchase the loan.

Better Mortgage

Better’s mission and advantages: Better’s tagline is “The status quo is broken.” The mortgage industry operates as if the Internet doesn’t exist, the company argues, with opaque and overly lengthy practices. So Better’s goal is to provide transparency during every step of the loan process — from crystal-clear FAQs and online resources to a streamlined application and speedy approval.

“We don’t want to just disintermediate for the sake of it,” says Taylor Salditch, Better’s vice president of marketing. “We really are trying to tackle the whole process and rebuild it in a holistic way.”

Better offers a single application platform that borrowers can access anytime to e-sign documents, link bank accounts and securely upload files from any device.

Borrowers can work on the application for a bit, then save their progress and come back later to finish up. It takes three minutes to receive a basic preapproval confirmation, and 24 hours for a “cash-competitive” verified preapproval letter. The entire process is personalized to each user, with different questions popping up based on responses. The company has funded more than $600 million in mortgages.

Customers can chat with a loan consultant as early in the process as they would like, to ask questions or get more information even before they begin. Once borrowers are approved for a loan, they are assigned to a “Loan Ranger” who serves as their point of contact.

Better offers home purchase loans for as little as 3% down, as well as a variety of loan types. Borrowers can play around with different fees and discount points to see how it affects their rate. Better also guarantees its loan estimate will be at least $1,000 less in closing costs compared with a competitor offering the same rate and loan terms — or they’ll pay you $1,000.

Potential cons: Better originates mortgages in only Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, North Carolina, New Jersey, Oregon, Pennsylvania and Washington, plus Washington, D.C. The company says it’s working to expand into more states soon. Better won’t offer loans for manufactured mobile homes, cooperatives or multifamily units.

Also, Better doesn’t service mortgages. As a direct lender the company processes the application and underwrites, closes and funds your loan. Once the loan is funded, however, Better’s servicing partner LoanCare services the loan for a temporary period of about 30 days. Then it’s transferred to a “reputable, quality investor that provides the right type of loan and servicing for your situation.”

Better’s application, step by step

getting a mortgage with better mortgage
Screenshot of the Better Mortgage application.

Better’s super-simple preapproval questionnaire is designed to help even customers who might be interested in buying a home sometime soon but don’t know where to start. First, Better asks if you already have an accepted purchase offer. If you do, you’ll enter the address and then Better will prompt you to create an account.

If you don’t have an accepted offer, then you’ll share the zip code where you’re looking and when you plan to make an offer (there’s an option to say “not sure”). Next, select which type of home you’re interested in — primary residence, second home or investment — and the property type (single family or condo/townhouse). At this point Better will ask you to create an account.

Then you’ll give Better permission to do a soft credit check that won’t affect your score, providing your name, current address, phone number and Social Security number. After a moment, Better will present your credit score from TransUnion and ask for a few more details: how you earn money, whether anyone else will be on the home’s title, if you’re working with a real estate agent, whether you currently pay rent or own properties, other assets available and the estimated purchase price of your home plus your maximum down payment percentage.

You’ll find out in a few moments whether you’re preapproved. If you are, you can look at rate options — terms include 30-, 20- and 15-year fixed, as well as a variety of adjustable rates — and select the one you like. Better says that basic preapproval takes about three minutes, and you can receive a verified preapproval letter within 24 hours.

Better wasn’t able to provide a demo after this point, because the rest of the process to loan purchase is a “personalized Q&A” that changes depending on the answers you provide. But Better says you can expect to need two years’ worth of the following documents: personal tax returns, business tax returns (if you own more than a quarter of the business) and W-2s or 1099s; plus two months of bank statements and proof of any alimony or child support payments.

Should you get an online mortgage?

A fully online mortgage process is great for buyers like the Olanoffs, and people who don’t want the hassle of meetings and phone calls. But other homebuyers might be unsettled by a “low-touch experience,” says Gumbinger, the HSH.com vice president.

A recent survey of about 2,000 U.S. adults conducted on behalf of the American Bankers Association showed that 60 percent use the Internet to research their home loans but would rather apply for a mortgage in person.

It’s important to ask yourself which of those groups you fall into. Are you a high- or low-touch shopper? Can you get your financial paperwork in order, or is it much more attractive to you to choose a lender who can automatically fill in that information? Is the ease and speed of the online process more valuable to you than the ability to have in-person meetings with a loan officer?

Whatever you do, shop around first

Even if your comfort level with a fully online experience is high, it’s paramount to do your homework when it comes to a decision as major as a mortgage. Compare experiences between both traditional and online lenders, be honest with yourself about your personal needs — and, though it goes without saying, we’ll say it anyway: Always shop around for rates. You can ask individual lenders for quotes (so long as you do them over a short period of time they should only count as one hard inquiry on your credit account) one at a time, or you can compare mortgage rates online from many lenders at once on sites like LendingTree.

“Just because someone has an electronic platform that’s easy and nice-looking, it doesn’t mean you’ll get the best possible price,” Gumbinger says. “On the flip side, the mortgage lender your aunt recommended may not have the best price, either. The fact of the matter is, you always need take a cross-cut of the marketplace to find where you can get the best deal for you.”

The post What it’s Really Like to Get a Mortgage Completely Online appeared first on MagnifyMoney.

A New Housing Bubble? Some Cities Might Already Be on the Cusp

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The housing market is heating up again. Home prices have risen faster than income growth in the past five years, and the combination of low housing supply and increasing demand is driving home values ever higher.

Could we be in danger of another housing bubble?

Economists don’t seem to be too worried about the national housing market.

Across the U.S., increases in home prices have outpaced income growth by 34 percent since 2012, driven by economic expansion. However, this percentage is less than half the pace seen between 1997 and 2006, according to a recent Urban Institute study.

For the most part, homes are still affordable relative to household incomes, experts say.

According to the Urban Institute, a Washington D.C.-based think tank that carries out economic and social policy research, a median-income household can afford a house that is $70,000 more expensive than the price of the median house sold on the market. In contrast, in 2006, there was a $22,000 shortfall between what the median household could afford and the median sales price.

“Yes, prices are high, yes, the market is expensive, and yes, housing is unaffordable for some people, but that does not mean we are in a bubble yet,” Nela Richardson, chief economist at  Redfin, a Seattle-based real estate and technology company, told MagnifyMoney. “Those attributes of a classic bubble are missing.”

By “classic bubble” attributes, Richardson is pointing to telltale signs of trouble, such as lax mortgage lending standards, rapidly rising mortgage rates and the levels of speculation in the housing market we experienced 10 years ago.

Even as home prices were skyrocketing, soft underwriting practices allowed a record number of people to purchase homes with very low down payments. As the crisis intensified, housing prices began to nosedive and borrowers who bought more home than they could afford eventually defaulted on mortgages.

In the wake of the Great Recession, the federal government implemented stricter mortgage lending regulations that have made it much harder for financially unstable borrowers to qualify for a mortgage loan.

“Any of the mortgages made today [are] just super clean” and there is a historically low default rate, Bing Bai, an Urban Institute researcher, told MagnifyMoney. “We are not in that kind of risk like the risk we had before in previous bubble years.”

Mortgage default rates have fallen to 3.68 percent for single-family homes, not quite as low as pre-recession levels but much better than the peak of 11.53 percent in 2010.

10 Metros at Risk of a Housing Bubble

 

So, the nation as a whole might not be facing an imminent bubble. However, Urban Institute economists have put certain cities of the country on the “bubble watch” list.

In the study, they analyzed 37 metro areas across the U.S. to find how much housing prices have gone up since their lowest point following the financial crisis and how affordable homes are based on the median income for that city. Below are the top 10 cities in danger of a housing bubble.

#1 San Francisco-Redwood City-South San Francisco, Calif.

#2 San Jose-Sunnyvale-Santa Clara, Calif.

#3 Miami-Miami Beach-Kendall, Fla.

#4 Oakland-Hayward-Berkeley, Calif.

#5 Portland-Vancouver-Hillsboro, Ore.-Wash.

#6 Seattle-Bellevue-Everett, Wash.

#7 Los Angeles-Long Beach-Glendale, Calif.

#8 Riverside-San Bernardino-Ontario, Calif.

#9 (tie) Denver-Aurora-Lakewood, Colo.

#9 (tie) Sacramento-Roseville-Arden-Arcade, Calif. 

California snags five of the top eight spots, led by the San Francisco metro area.

In San Francisco, for example, a family earning the median income for the area needs to dedicate at least 70 percent of income for a typical 30-year fixed-rate mortgage, Bai said. The median home sales price is $1.2 million in the Bay Area, according to Redfin and Trulia, an online real estate resource for homebuyers and renters.

The overheated housing situation in the Silicon Valley and Seattle is largely a result of the tech boom during the years of economic recovery, Richardson said. Yet demand is still going strong with healthy job increases despite stunning home prices.

“There’s a lot of money looking for a place to land,” Richardson added.

Some other cities seeing swelling housing prices are in Florida and Texas. Not coincidentally, the coastal real estate markets are where international investors have been pumping in large sums of money in recent years, pushing demand even higher. The Urban Institute reported that California, Florida and Texas are the top U.S. destinations for foreign buyers.

“It’s not just about the local economy in these markets,” Richardson said. “It’s about the global economy.”

Advice for home buyers in super expensive cities

The truth is, experts don’t see a sign of price decline in hot markets any time soon.

“Demand is still there, with low supply, [and] it’s just going to keep prices high,” Cheryl Young, senior economist at Trulia, told MagnifyMoney.

If you are looking to buy in cities where home prices are sky-high and competition is extremely fierce, here is what pros suggest you can do to bid for a desirable house:

Time it right

“Home buying is all about timing,” Young said. “We always say you shouldn’t rush to enter the housing market if you are not ready.”

If you’ve definitely decided to buy, the best time to start looking might be during the fall. Young said home prices are, in general, at their nadir in the wintertime, so you may want to start looking in the fall when prices started to dip as home supply is higher than they are at other times of the year.

Check out our story on why October’s the best time to start looking for your first home.

Come to the table prepared

When you are ready to start looking, you also need to save up for a down payment, Young said.

A good rule of thumb for a down payment is 20 percent. That way you could avoid paying for the additional cost of private mortgage insurance. But the reality is that it’s tough for buyers to put down that much money, especially if you are in a super-expensive market. It’s fine if you can’t save up for 20 percent, but of course the more you can scrounge up, the better.

Also recommended: Have all your financial statements ready and compare mortgage rate offers from several financial institutions to be sure you’re getting the best deal. Avoid these common mistakes homebuyers make before they apply for mortgages.

“Working with someone who knows the local area, who knows how to strategize how to make an offer that is as good as cash or almost as good as cash if you are in a competitive market is very important,” said Richardson.

If you can get preapproved for a mortgage, it will give you a competitive advantage.

“It’s really about showing the seller that you are ready when the opportunity comes up so that you can lock in the purchase,” Young said.

The post A New Housing Bubble? Some Cities Might Already Be on the Cusp appeared first on MagnifyMoney.

Why Do I Have to Pay My Real Estate Agent 6%?

buying-house-afford

When it’s time to sell your house, you may have visions of dollar signs dancing in your head, but the truth is, a lot of those dollars will never make it into your bank account. Instead, they end up in the pockets of real estate agents.

You’ve probably heard that agents, on average, take a 6% commission off of your home’s sale price. On a $300,000 home, that’s a whopping $18,000. Before handing over that chunk of change, it’s important to understand what it pays for—and if there’s anything you can do about it.

How Do Real Estate Agents Get Paid?

First, let’s take a look at the history of realtor fees. Realtor fees are usually paid as a commission, although flat fees apply in rare cases. This commission is taken right off the top of the selling price of the home, so many sellers don’t really feel the impact because they never had the money to begin with.

Since the 1950s, the National Association of Realtors has used a “suggested” commission rate for real estate agents. This rate landed at around 6% of a home’s selling price, which included commission for both the buyer’s and the seller’s agents. In 2016, that rate was closer to 5%, which provides a small amount of relief for home sellers looking to maximize their equity when they sell their home.

What Does a Real Estate Agent’s Commission Pay For?

Even at 5%, real estate agents would take home an average of about $15,000 on the sale of a $300,000 home. The total commission is split between both the listing and the buying agents, minus any fees the agents must pay to their brokerage. So let’s break down what you get for $15,000.

  • Help pricing your home. Expertise is at the top of the list of what a real estate agent brings to the party. This means they should be able to help you price your home competitively and in a manner that helps you reach your goals—whether you’re after a quick sale or a big sale price.
  • Effective marketing. One of an agent’s biggest jobs is to make your home look great and to stir up interest in the property. They may take photos, post online ads, use social media, host open houses, and anything else that puts your home in front of qualified buyers.
  • Screening for qualified buyers. It doesn’t do you any good if the people looking at your home aren’t able to buy it. A real estate agent should do all the footwork required to make sure anyone who’s interested in your house is preapproved for a home loan.
  • Closing expertise. Finally, a real estate agent should be well-versed in the art of closing a home sale. Their job is to get you the best price with the least hassle and walk you through all the steps you need to take to make sure your sale goes smoothly. This applies to showings, appraisals, inspections, and the final paperwork.

Can I Save Money on Real Estate Agent Commission?

The good news is you’re not stuck having to fork over 5% of your home’s selling price. If you don’t relish the idea of waving goodbye to that hefty sum, here are some alternatives.

1. Negotiate the commission rate. Just because 5–6% is common, it doesn’t mean that’s what you have to accept. Ask your real estate agent if they’re willing to take less.

“Offer 4%,” suggests Bob Nettleton, who successfully negotiated the commission when he used a real estate agent to sell his home. Or, he says, offer 2% if you find the buyer on your own and just need the agent to help with the standard process. Nettleton adds that other factors, such as home price and how many services you expect, can also affect how much you negotiate on the commission.

2. Sell your home by yourself. More people are opting to sell their home without a real estate agent. This saves on commission fees, but it means you have to do all the work to market your home and vet potential buyers. People who want to go the FSBO (For Sale by Owner) route can find help through services like Homie and Zillow.

Keep in mind that the buyer may have an agent who will expect a commission, so that’s another factor that will play into negotiation of the final sales price. If you opt for FSBO, you may also need to do additional homework like finding a mortgage lender who can help complete the sale.

Other Financial Considerations When Buying a Home

No matter what, you want to get the most out of selling your home. But real estate agent commission is just one part of the overall financial transaction of buying or selling a home.

Chances are if you’re selling a home, you’re probably also looking to buy another one. Negotiating how much you pay a real estate agent may pale in comparison to the extra money you’ll spend over the lifetime of a mortgage if you get locked into poor interest rates or your credit is less than perfect. Check the mortgage marketplace for interest rates and make sure your credit is in tip-top shape before you start looking for your next house. One factor many sellers overlook is the possible impact that selling their home could have on their credit.

If you’re concerned about your credit score, take advantage of a free credit report. This report lets you keep tabs on your credit, and it includes free updates every 30 days to help you proactively correct mistakes and improve your score. You also don’t need to let bad credit get in the way of refinancing your home.

Take Control of Your Home Sale

Managing big transactions like selling or buying a home can feel overwhelming, but there’s no need to panic. Just keep in mind that, ultimately, you are the one in control over the sale of your home. Weigh out the pros and cons of paying a full commission, and take the steps necessary to get a final profit out of your home that makes you happy.

Image: istock

The post Why Do I Have to Pay My Real Estate Agent 6%? appeared first on Credit.com.

The 5/1 ARM Mortgage: What Is It and Is It for Me?

5/1 ARM mortgage
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Finding the right mortgage can be a confusing process, especially for first-time homebuyers. There are so many options that it can be hard for a consumer to know how to get the optimal rate and terms.

One way to get a better initial interest rate is by taking out a 5/1 ARM mortgage. Small wonder that many potential borrowers want to know what makes a 5/1 ARM mortgage so unique and whether it might be the right loan for them.

Below is a guide to how 5/1 ARM mortgages work, how they are different from traditional 15- and 30-year mortgages, and what pros and cons consumers need to understand.

How a 5/1 ARM works

A 5/1 ARM mortgage, as explained by MagnifyMoney’s parent company, LendingTree, is a type of adjustable-rate mortgage (hence, the ARM part) that begins with a fixed interest rate for the first five years. Then, once that time has elapsed, the interest rate becomes variable. A variable rate means your interest rate can change. Consequently, so can your payment.

The number “5” in “5/1 ARM” means that your interest rate is fixed for five years. The number “1” in “5/1 ARM” means your interest rate could change each year after the first five years have passed.

Interest rates are based on an index, which is a benchmark rate used by lenders to set their rates. An index is based on broad market conditions and investment returns in the U.S.. Thus, your bank can adjust its interest rates at any point that the benchmark rate changes or if there are major fluctuations in the U.S. stock market.

What’s fixed? What’s adjustable?

Fixed-rate mortgages have the same interest rate for the duration of the mortgage loan. The most common loan periods for these are 15- and 30-year.

Because a 15-year fixed rate mortgage is, obviously, for a shorter term than a 30-year fixed rate mortgage, you will likely pay much less interest over time. However, as a result, you will have a higher monthly mortgage payment since the loan payoff period is condensed to 15 years.

Adjustable-rate mortgages like the 5/1 ARM loan mentioned above have a fixed interest rate for the beginning of the loan and then a variable rate after the initial fixed-rate period.

The chart below shows an example of the same house with three different types of mortgages.

As you can see below, the 15-year fixed rate mortgage has a lower interest rate, but a much higher payment. The 5/1 ARM has the lowest interest rate of all, but once that interest rate becomes variable, the lower rate is not guaranteed. This is one of the cons of a 5/1 ARM mortgage, which will be outlined in the next section.

Mortgage snapshot

Here is an example of three different types of mortgage payments for someone taking out a $200,000 mortgage. The chart below makes the assumption that the fictional person this is for has a high credit score and qualifies for good interest rates.

 

Interest Rate

Monthly payment

Principal Paid
After 5 Years

Total Interest Cost
After 5 Years

30-year fixed

3.625%

$912.10

$20,592.12

$35,046.14

15-year fixed

3.0%

$1,403

$57,987.88

$26,263.08

5/1 ARM

2.875%

$829.78

$22,595.20

$27,191.90

The pros and cons of 5/1 ARM mortgages

The pros

The biggest advantage of a 5/1 ARM mortgage is that interest rates are typically lower for the first five years of the loan than they would be with a typical 15- or 30-year fixed-rate deal. This allows the homeowner to put more of the monthly payment toward the principal balance on the home, which is a good way to gain equity in the property.

The 5/1 ARM mortgage commonly has a lifetime adjustment cap, which means that even though the rate is variable, it can never go higher than that cap. That way, your lender can tell you what your highest monthly payment will be in the future should your interest rate ever reach that point.

The cons

As mentioned above, the con of a 5/1 ARM mortgage is the whole “adjustable” component. Once you get past the five-year term, there will be uncertainty. Every year after the fifth year of your mortgage, the rate can adjust and keep adjusting.

There is a way around this. You can refinance your mortgage after the five years and secure a new mortgage with a fixed rate. But be warned: Refinancing comes with fees. You will have to calculate on your own whether or not the savings you derive from a lower payment for five years is worthwhile as you measure it against the cost of refinancing to a fixed-rate loan.

That’s why it’s important to know how long you want to live in your home and whether or not you’ll want to sell your home when you move (as opposed to, say, renting it out).

A 5/1 mortgage is right for …

“For certain people, like first-time homebuyers, 5/1 ARM mortgages are very useful,” Doug Crouse, a senior loan officer with nearly 20 years of experience in the mortgage industry, tells MagnifyMoney.

Here are the types of people who could benefit from a 5/1 ARM mortgage:

  • First-time homebuyers who are planning to move within five years.
  • Borrowers who will pay off their mortgages very quickly.
  • Borrowers who take out a jumbo mortgage.

Crouse explains that with some first-time homebuyers, the plan is to move after a few years. This group can benefit from lower interest rates and lower monthly payments during those early years, before the fixed rate changes to a variable rate.

Mindy Jensen, who is the community manager for BiggerPockets, an 800,000-person online community of real estate investors, agrees. “You can actually use a 5/1 ARM to your advantage in certain situations,” Jensen tells MagnifyMoney.

For example, Jensen mentions a 5/1 ARM could work well for someone who wants to pay down a mortgage very, very quickly. After all, if you know you’re going to pay off your loan early, why pay more interest to your lender than you have to?

“Homeowners who are looking to make very aggressive payments in order to be mortgage-free can use the 5/1 ARM” to their advantage, she explains. “The lower initial interest rate frees up more money to make higher principal payments.”

Another group that can benefit from 5/1 ARM mortgages, Crouse says, is those who take out or refinance jumbo mortgages.

For these loans, a 5/1 ARM makes the first few years of mortgage payments lower because of the lower interest rate. This, in turn, means that the initial payments will be much more affordable for these higher-end properties.

Plus, if buyers purchased these more expensive homes in desirable areas where home prices are projected to rise quickly, it’s possible the value of their home could soar in the first few years while they make lower payments. Then, they can sell after five years and hopefully make a profit. Keep in mind that real estate is a risky investment and nothing is guaranteed.

The 5/1 isn’t right for …

Long-term home buyers who plan to stay put for the long haul probably won’t benefit from a 5/1 ARM loan, experts say. “An adjustable-rate mortgage loan is a bad idea for anyone who sees their home as a long-term choice,” Jensen says.

Crouse echoes the sentiment: “If someone plans to stay in their home for longer than five years, this might not be the best option for them.”

Jensen adds that homeowners should consider whether or not they want to be landlords in the future. If you decide to move out of your home but keep the mortgage and rent a property, it won’t be so beneficial to sign up for a 5/1 ARM loan.

Questions to ask yourself

If, after reading this guide, you think a 5/1 ARM mortgage might be right to you, go through this list of questions to be sure. Remember, you can also consult with your lender.

  • How long do I want to live in this home?
  • Will this home suit my family if my family grows?
  • Is there a chance I could get transferred with my job?
  • How often does the rate adjust after five years?
  • When is the adjusted rate applied to the mortgage?
  • If I want to refinance after five years, what is the typical cost of a refinance?
  • How comfortable am I with the uncertainty of a variable rate?
  • Do I want to rent my house if I decide to move?

Hopefully these questions and this guide can aid you in reaching a sensible decision.

The post The 5/1 ARM Mortgage: What Is It and Is It for Me? appeared first on MagnifyMoney.

Can You Use a Personal Loan for a Home Down Payment?

iStock

Scraping together the down payment on their mortgage is the biggest challenge facing many would-be homebuyers. And lots of those would probably like to use a personal loan to top up their savings so they reach their lender’s threshold. But can they do that?

The short answer is that few lenders would give their consent to a borrower looking to use a personal loan for their down payment. You would be taking on new debt and then taking on even more debt on top of that…not exactly the greatest solution.

The good news is that there are lots of different options out there for low down payment mortgages and even assistance programs that can help you get together funds for a down payment.

How Much Do I Really Need For A Down Payment?

Let’s make sure you know how big your down payment needs to be. Because, if you are a bit fuzzy on that, you are not alone. And you could be in for some good news.

A survey of professionals at a 2017 conference hosted by the Mortgage Bankers Association revealed a persistent myth: Twenty-eight percent of respondents thought “consumers still mistakenly believe that a 20 percent down payment is a requirement for purchasing a home.” And another four in 10 respondents thought that even those who knew 20 percent isn’t necessary still believed they’d find it difficult to buy a home with less.

Those consumers couldn’t be more wrong. Creditworthy buyers can usually get approved for a mortgage with a down payment as small as 3 or 3.5 percent. And some (more than you may think) who qualify for specialist mortgage programs need put down nothing. Discover more about all those options below.

Here are the minimum down payments required for a selection of mortgages.

Remember: You may get a better mortgage rate if you increase the amount you put down.

The Best Mortgages for a Low Down Payment

Type of Loan

Down Payment Requirement


Mortgage Insurance

Credit Score Requirement

FHA

FHA

3.5% for most

10% if your FICO credit score is between 500 and 579

Requires both upfront and annual mortgage insurance for all borrowers, regardless of down payment

500 and up

SoFi

SoFi

10%

No mortgage insurance required

Typically 700 or higher

VA Loan

VA Loan

No down payment required for eligible borrowers (military service members, veterans, or eligible surviving spouses)

No mortgage insurance required; however, there may be a funding fee, which can run from 1.25% to 2.4% of the loan amount

No minimum score
required

homeready

HomeReady

3% and up

Mortgage insurance required when homebuyers put down
< 20%; no longer required once the loan-to-value ratio reaches 78% or less

620 minimum

homeready

USDA

No down payment required

Ongoing mortgage insurance not required, but borrowers pay an upfront fee of 2% of the purchase price

620-640 minimum

Conventional loans (one not backed by a government program)
A conventional loan is simply a type of mortgage loan that isn’t backed by a government program. Usually these loans require a 5 to 20 percent down payment, though that can be as low as 3 percent using offerings such as Fannie Mae’s HomeReady or Freddie Mac’s Home Possible mortgages. You will need to be reasonably creditworthy.

SoFi

SoFI offers mortgage loans for minimum down payments of 10 percent. You can borrow between $100,000 and $3 million. And you will not have to pay for private mortgage insurance (we’ll talk more about PMI below), even though you have not reached the usual 20 percent down payment threshold. But you will need to have good-to-great credit and sound finances.

Federal Housing Administration mortgage (FHA loan)

FHA mortgages require a 3.5 percent down payment if your credit score is 580 or higher. This can be good if your credit score is less than stellar, but it may be more costly than other options. That is because you will be liable for mortgage insurance premiums (MIPs), which will be added to your monthly mortgage payments.

U.S. Dept. of Agriculture mortgage (USDA loan)

USDA loans require no down payment, unless you have significant assets. There are various eligibility criteria, including your having a low to moderate income. And you must purchase in an eligible area, although those areas make up 97 percent of the nation’s land mass. You can check if you and your area qualify using a tool on the USDA website.

Veterans Affairs mortgage (VA loan)

VA loans also require no down payment. These are for veterans, those still serving in the military and related groups. You can check your eligibility on the VA website. If you qualify, it is highly likely this will be the best mortgage you can get.

Learn more by checking out our guide to The Best Mortgages That Require No or Low Down Payment.

3 Ways To Get Help With Your Mortgage Down Payment

Down payment assistance programs

Before exploring ways of borrowing to top up your down payment funds, you should definitely check out your eligibility under various assistance programs. These are typically targeted at middle- and low-income buyers, and you may have to use a lender that participates in the program.

Some programs provide outright grants or gifts that do not have to be repaid. And they are often available to both first-time buyers and existing homeowners.

Many of these down payment assistance (DPA) programs are state-based. You can click through to your local offering, if any, from the U.S. Department of Housing and Urban Development (HUD) website, which has a link for each state. You should also call your city or county to see if it operates a similar, parallel program.

Others are run across multiple states by nonprofits, such as the National Homebuyers Fund. Freddie Mac recommends a look-up tool on the private Down Payment Resource website as a way of tracking down DPA programs for which you might be eligible.

Finally, do not forget to check with your human resources department. Some employers offer help.

Using a gift from family or friends

Suppose you cannot get help from a mainstream DPA or your employer. Perhaps your parents or another close relative, fiancé, fiancée or domestic partner may be willing to give you a gift toward your down payment. Your lender should normally have no problems with this arrangement. But it is very likely to apply a couple of industry-standard rules:

  1. You must meticulously document the gift process and provide copies of the donor’s withdrawal slip or check, and the recipient’s deposit slip. If appropriate, a copy of the donor’s check to the closing agent is fine.
  2. You must provide a letter or form signed by the donor declaring that the payment is a gift and not a loan. This must include certain information and statements, and you can download a sample gift letter from the NOLO legal website.

Many lenders will allow this gift to cover 100 percent of the down payment. However, some may prefer you to provide some of the funds yourself.

Expect your loan officer to be mildly suspicious of large gifts. Some applicants try to sneak through money that is actually a loan in disguise, risking jail time or fines for mortgage fraud. If you raise any red flags, your loan officer can investigate the funds in great detail, including their ultimate source.

It is generally fine to borrow money from friends or relations for part of your down payment, providing you declare the loan(s) to your lender. It can then include your repayments when it assesses your ability to afford your mortgage.

Central to that assessment is your debt-to-income (DTI) ratio. As the name suggests, that is the proportion of your monthly income that goes out in debt payments, including minimum payments on credit cards and standard payments on instalment loans, such as auto, student and personal loans, as well as your new mortgage. You should also include any regular commitments for alimony or child support.

LendingTree has a DTI calculator that can help you determine yours. If you plan on borrowing for your down payment, include the payments on the loan(s) from your family or friends when you use it. It is unlikely a lender will allow your DTI to be higher than 50 percent. Some types of mortgage require 43 percent, and many lenders prefer it to be in the 30s.

Borrowing from yourself

One way to keep your DTI low is to borrow from yourself because not all lenders count repayments of such loans in your DTI, even if you have to make them. But you need to check your lender’s policy before you proceed, and either rule out this option or find a more sympathetic source for your mortgage.

How do you borrow from yourself? By raiding your retirement pot. You may be able to make a withdrawal or take a loan from your 401(k), IRA or Roth IRA to fund your down payment.

But, unless you are a tax accountant, you should take professional advice before doing so. No, really. This is a big step with lots of potential implications.

Potential implications of raiding your retirement funds

  1. Unless you use money in a Roth IRA, you could find yourself with significant tax liabilities if the loan isn’t repaid.
  2. If you withdraw money from your 401(k), your employer could demand immediate repayment in full if you switch jobs or otherwise leave.
  3. Some 401(k) funds have rules against this sort of borrowing.
  4. Whatever you do, there is a high chance your retirement fund will take a big hit.

As previously suggested, take advice from a trusted, reputable professional.

Advantages of making a 20 percent down payment

There’s a reason that 20 percent down payment myth survives. It may well be that, decades ago, your parents or grandparents had to find that much as a minimum.

And 20 percent remains an important threshold for borrowers. Put down that much or more, and you won’t have to pay for private mortgage insurance (PMI).

You have to pay the premiums for PMI (they are mostly wrapped up in your monthly mortgage payment, but you may have to make an upfront payment too), but the only benefit you get from them is an ability to borrow with a smaller down payment. If any claim is made on the policy, probably because you have defaulted on your loan, the payout will go directly to the lender.

The biggest downside to a low down payment: PMI

Like we mentioned, most mortgage loans that come with a low down payment requirement have a big caveat — the added cost of private mortgage insurance.

The amount you pay for PMI will depend on the type of mortgage you choose and maybe your personal circumstances:

  • Conventional loan — You will get a quote from your lender. Monthly payments are typically lower than on some other types of mortgage and will depend on your credit score and the size of your down payment. Your upfront payment is likely to be small or sometimes zero.
  • SoFi loan — There is no PMI and so no MIPs on these loans with a down payment equal to or higher than 10 percent.
  • FHA loan — This is often the most expensive type of PMI. But its costs are not affected by your credit score, and the size of your down payment tends to have less impact. So this is a good bet if your credit is iffy and you don’t have substantial savings. At the time of writing, in 2017, you can expect to pay 1.75 percent of the loan value as an upfront charge, and then anything between 0.45 percent and 1.05 percent annually, depending on how much you borrowed and the sizes of your original loan and down payment. Although calculated on an annual basis, ongoing premiums are spread evenly through the year and collected through your monthly payments. If you cannot afford the upfront payment, it may be possible to wrap it up in your overall loan.
  • USDA loan — This is similar to the FHA loan’s PMI model, but typically has lower upfront and monthly payments. As with FHA loans, if you cannot afford the upfront payment, it may be possible to wrap it up in your overall loan.
  • VA loan — You do not pay ongoing monthly premiums with one of these. However, you do pay an upfront cost, called a “funding fee.” For first-time buyers in 2017, these range from 1.25 percent to 2.4 percent, depending on your type of service and the size of your down payment. For regular military with a zero down payment, it is 2.15 percent. If you cannot afford that funding fee, you may be able to wrap it up in your overall loan.

Most sorts of PMI terminate (either automatically or on request) when your mortgage balance reaches 80 percent of the contract price or the property’s appraised value when you bought your home. However, that does not apply to FHA loans. You will likely be on the hook for PMI premiums for those until you move or refinance.

Should you wait to get a mortgage until you can avoid PMI?

By now you may be pondering a dilemma: Should you jump into the market now and swallow those PMI costs? Or might you be better off holding back until you have the whole 20 percent down payment, thus avoiding PMI altogether?

Your smart choice largely depends on the real estate market where you want to buy. It might also depend on the market where you are selling, if you are not a first-time buyer. And it is mostly down to math.

A matter of math

Research home-price trends in your target neighborhood to see whether they are rising (they are in most places) and, if so, how quickly. Bear in mind that some forecasting companies expect growth to continue, but more slowly. For example, CoreLogic calculated home prices grew 6.7 percent nationwide in the year ending July 2017, but expects that to slow to 5 percent by July 2018.

It makes sense to go ahead and jump into the housing market if you anticipate that the value of your home will increase sufficiently year after year to offset the added cost of PMI.

Once you have a feel for those price trends, use a calculator like MagnifyMoney parent company LendingTree’s mortgage calculator to model your options. It will itemize your PMI as part of your total monthly payment. Work out how much you could save by avoiding PMI, and compare that with how much you stand to lose in home-price inflation if you wait to save that 20 percent.

You are now in a position to make an informed decision over whether to buy now or carry on saving. Of course, if in the meantime you find the home of your dreams, you can always choose to go with your heart rather than your head.

For more information, read What Is PMI and Is It Really That Bad?

One last thing about personal loans…

There are lots of things to like about personal loans. They are easy, quick and relatively cheap (or often free) to set up. They almost always have lower interest rates than credit cards for equivalent borrowers. And they make budgeting simple, because you know how much you will pay each month, subject to rate hikes.

However, typically their rates are noticeably higher than secured loans, such as mortgages and home equity products. And you need good credit to get a low interest rate.

Some lenders advertise personal loans for as much as $100,000. Others have more modest caps. How much you will be able to borrow will depend on many factors, including how easily you can afford to repay it and your credit score.

Find out more at Shopping for Personal Loans.

The post Can You Use a Personal Loan for a Home Down Payment? appeared first on MagnifyMoney.

Understanding the FHA 203k Loan

Finding your dream home is hard.

Unless you have an unlimited budget, just about any home you buy will require compromise. The house that’s move-in ready might have fewer bedrooms than you’d like. The house that’s in the perfect location might need a lot of repairs.

Sometimes it feels like you’ll never be able to afford the house you truly want.

This is where the FHA 203(k) loan can be a huge help.

The FHA 203(k) loan is a government-backed mortgage that’s specifically designed to fund a home renovation. Whether you’re buying a new house that needs work or you want to upgrade your current home, this program can help you do it affordably.

Part I: Understanding the basics of 203(k) loans

What is a 203(k) loan?

The FHA 203(k) loan is simply an extension of the regular FHA mortgage loan program. The loan is backed by the federal government, which provides two big advantages:

  1. You can qualify for a down payment as low as 3.5 percent.
  2. You can quality with a credit score as low as 500, although better credit scores allow for better loan terms.

The additional benefit of the 203(k) loan over regular FHA loans is that it allows you to take out a single loan to finance both the purchase and renovation of a property, giving you the opportunity to build your dream home with minimal money down.

How a 203(k) loan works

A 203(k) loan can be used for one of two purposes:

  1. Buying a new property that’s in need of renovations, from relatively minor improvements to a complete teardown and rebuild.
  2. Refinancing your existing home in order to fund repairs and improvements.

The maximum loan amount is determined by the general FHA mortgage limits for your area, and the minimum repair cost is $5,000. But as opposed to a conventional loan, in which your mortgage is limited to the current appraisal value of the property, a 203(k) loan bases the mortgage amount on the lesser of the following:

  • The current value of the property, plus the cost of the renovations
  • 110 percent of the appraised value of the property after the renovations are complete

In other words, it enables you to purchase a property that you otherwise might not be able to take out a mortgage on because the 203(k) loan factors in the value of the improvements to be made.

And it allows you to do so with a down payment as low as 3.5 percent, which can be especially helpful for first-time homebuyers who often don’t have as much cash to bring to the table.

All of this opens up a number of opportunities that would otherwise be off limits to many homebuyers. For Pamela Capalad, a fee-only certified financial planner and the founder of Brunch & Budget, it was the only way that she and her husband could afford a house in Brooklyn, N.Y., which is where they wanted to live.

“Finding out about the 203(k) loan opened us up to the idea of buying a house that needed to be renovated,” Capalad said. “It was by far the most budget-friendly way to do it.”

Of course, the opportunity comes with some additional costs.

According to Eamon McKeon, a New York-based renovation loan specialist, interest rates on a 203(k) loan are typically 0.25 to 0.375 percentage points higher than conventional loans.

They also require you to pay mortgage insurance. There is an upfront premium equal to 1.75 percent of the base loan amount, which is rolled into the mortgage. And there is an annual premium, paid monthly, that ranges from 0.45 to 1.05 percent, depending on the size of the loan, the size of the down payment, and the length of your mortgage.

Additionally, McKeon cautioned that unlike conventional loans, this mortgage insurance premium is applied for the entire life of the loan unless you put at least 10 percent down. The only way to get rid of it is to refinance.

What renovations can be financed through a 203(k) loan?

Source: iStock

A 203(k) loan allows you to finance a wide range of renovations, all the way from small improvements like kitchen appliance upgrades to major projects like completely tearing down and rebuilding the house.

The U.S. Department of Housing and Urban Development provides a list of eligible improvements:

The big stipulation is the work has to be done by a contractor. You are not allowed to do any of the work yourself (though there is an exception to this rule for people who have the skills to do it).

According to McKeon, this is the most challenging part of successfully executing a 203(k) loan. He said the vast majority of the projects he sees go south have contractor-related issues, from underestimating the bid, to being unresponsive, to not having the correct licenses.

On the flip side, one of the benefits is that the bank helps you manage costs. They put the money needed for the renovations into an escrow account and only release it to the contractor as improvements are made and inspected.

For Capalad and her husband, this arrangement was one of the draws of the 203(k) loan.

“I liked knowing that the contractor couldn’t suddenly gouge us,” she said. “He couldn’t quote $30,000 and then come back later and tell us we actually owed him $100,000.”

Capalad suggested using sites like Yelp and HomeAdvisor, as well as references from friends, to find a contractor. She said you should interview at least four to five people, get bids from each, and not necessarily jump at the cheapest bid.

“We made the mistake of immediately rejecting higher estimates,” said Capalad. “We realized later that their estimates were higher because they were more aware of what needed to be done and how the process would work.”

Who can use a 203(k) loan?

A 203(k) loan is available to anyone who meets the eligibility requirements (discussed below) and is looking to renovate a home.

It’s often appealing to first-time homebuyers, who are generally younger and therefore less likely to have the cash necessary for either a conventional mortgage or to fund the renovations themselves. But there is no requirement that you have to be a first-time homebuyer.

The program can also be used to finance either the purchase of a home in need of renovation or to refinance an existing mortgage in order to update your current home.

3 reasons to use a 203(k) loan

There are a few common situations in which a 203(k) loan can make a lot of sense:

  1. Expand your opportunity: In a hot market, move-in ready homes often sell quickly and for more than asking price. A 203(k) loan can open up the market for you, allowing you to choose from a wider range of properties knowing that you can improve upon any house you buy.
  2. Upgrade your current home: If you want to add a bedroom, redo your kitchen, or make any other improvements to your current home, a 203(k) loan allows you to refinance and fold the cost of those upgrades into your new mortgage with a smaller down payment than other options.
  3. Increase your home equity: McKeon argued that anyone taking out a regular FHA loan should at least consider turning it into a 203(k) loan. With the right improvements, you could increase the value of your home to the point that you have enough equity after the renovations to refinance into a conventional mortgage and remove or reduce your monthly mortgage insurance premium.

What it takes to qualify for a 203(k) loan

Qualifying for a 203(k) loan is much like qualifying for a regular FHA mortgage loan, but with slightly stricter credit requirements.

“FHA may allow FICO scores in the 500s, [but] banks/lenders have discretion or are required to only go so low on the score,” McKeon said.

Here are the major criteria you’ll have to meet:

  • You have to work with an FHA-approved lender.
  • The minimum credit score is 500, though McKeon said a credit score of 640 is typically needed in order to secure the smallest down payment of 3.5 percent.
  • You have to have sufficient income to afford the mortgage payments, which the lender determines by evaluating two years of tax returns.
  • Your total debt-to-income ratio typically cannot exceed 43 percent.
  • You must have a clear CAIVRS report, indicating that you are not currently delinquent and have never defaulted on any loans backed by the federal government. This includes federal student loans, SBA loans and prior FHA loans.
  • The current property value plus the cost of the renovations must fall within FHA mortgage limits.

The 203(k) loan application process

McKeon said the process of applying for a 203(k) loan generally looks like this:

  1. Get preapproved for a mortgage by an FHA-approved lender.
  2. Find a property you want to buy and submit an offer.
  3. Find an approved 203(k) consultant to inspect the property and create a write-up of repairs needed and the estimated cost.
  4. Interview contractors, receive estimates, and select one to be vetted and approved by your lender.
  5. Obtain an appraisal to determine the post-renovation value of your house.
  6. Provide other information and documentation as requested by your lender in order to finalize loan approval.

Property types eligible for 203(k) loans

A 203(k) loan can be used for any single-family home that was built at least one year ago and has anywhere from one to four units. You can use the loan to increase a single-unit property into a multi-unit property, up to the four-unit limit, and you can also use it to turn a multi-unit property into a single-unit property.

These loans can be used to improve a condominium, provided it meets the following conditions:

  • It must be located in an FHA-approved condominium project.
  • Improvements are generally limited to the interior of the unit.
  • No more than 5 units, or 25 percent of all units, in a condominium association can be renovated at any time.
  • After renovation, the unit must be located in a structure that contains no more than four units total.

A 203(k) loan can also be used on a mixed residential/business property if at least 51 percent of the property is residential and the business use of the property does not affect the health or safety of the residential occupants.

It’s worth noting that the property must be owner-occupied, so a 203(k) loan is not an option for a pure investment property.

Within those limits, a wide variety of properties could qualify. McKeon noted that when he writes these loans, he doesn’t care about the current condition of the property. Everything is based on the renovations to be done and the future condition of the property.

Part II: Types of 203(k) loans

Standard vs. streamline 203(k) loans

A streamline 203(k) loan, or limited 203(k) loan, is a version of the 203(k) loan that can be used for smaller renovations. While there is no limit to the renovation costs associated with a standard 203(k) loan — other than the general FHA mortgage limits — a streamline 203(k) can only be used for up to $35,000 in repairs. There is no minimum repair cost.

In return, you get an easier application process. While a standard 203(k) loan requires you to hire a HUD-approved 203(k) consultant to help manage the renovation process, a streamline 203(k) does not.

However, there are limits to the kind of work you can have done with a streamline 203(k) loan. You can review the list of allowed improvements here and the list of ineligible improvements here, but here’s a quick overview of what isn’t allowed with a streamline 203(k):

  • The improvements can’t be expected to take more than six months to complete.
  • The improvements can’t prevent you from occupying the property for more than 15 days during the renovation.
  • You cannot convert a single-unit home into a multi-unit home, or vice versa.
  • You cannot do a complete teardown.

So when does a streamline 203(k) loan make sense over a standard 203(k) loan? Here is when it’s worth considering:

  • The property requires less than $35,000 in repairs and otherwise falls within the requirements for an eligible renovation.
  • You are comfortable scoping the work, gathering contractor estimates, and supervising the renovations without the help of a consultant.
  • You don’t expect the renovations to require an extensive amount of time.
  • You like the idea of minimizing paperwork and otherwise shortening the entire process.

Part III: Is a 203(k) loan the best option for you?

Alternatives to a 203(k) loan

Of course, a 203(k) loan isn’t the only way to finance a renovation. Here are some of the alternatives.

Fannie Mae HomeStyle Renovation Mortgage

The Fannie Mae HomeStyle Renovation Mortgage is a conventional conforming mortgage that, like the 203(k) loan, is specifically designed to finance renovations.

The biggest drawback is that it requires a 5 percent down payment as opposed to 3.5 percent. That can potentially require you to bring a few thousand dollars more in cash to the table.

But McKeon says that if you can afford it, it’s usually a better option. The biggest reason is that your monthly private mortgage insurance (PMI) is typically less, and it automatically drops off once your loan-to-value ratio reaches 78 percent, as opposed to a 203(k) loan where the PMI generally lasts for the life of the loan.

Home equity loan

If you’re looking to renovate your current home, one option would simply be to take out a home equity loan that allows you to borrow against the equity you’ve already built up in your house.

The advantages over a 203(k) loan would generally be a potentially lower interest rate and fewer restrictions around what improvements are made and who makes them.

The big downside is that your loan is limited to your current equity. If you purchased your home relatively recently, or if your home has decreased in value, you may not have enough equity to finance a sizable improvement. And if you are looking to purchase and renovate a new home, the 203(k) loan is likely the better option.

Title I property improvement loan

Like 203(k) loans, Title I property improvement loans are backed by the federal government. They allow you to borrow up to $25,000 for single-family homes, and up to $12,000 per unit for multi-unit properties, to improve a home you currently own.

This loan could be preferable to a 203(k) loan if the improvements you want to make are relatively small, you don’t want to refinance or don’t have the money for a down payment, and/or you’d like to avoid some of the requirements and inspections surrounding a 203(k) loan.

Personal savings

If you have the savings to afford the renovations yourself, or if you can wait until you do have the savings, you could save yourself a lot of money by avoiding financing altogether.

Of course, this may or may not be realistic, depending on the type of project you’re considering. For smaller projects that aren’t urgent, this is a worthy candidate. For larger projects or those that need to be addressed immediately, financing may be the only way to make it happen.

203(k) loans open up new opportunities

The FHA 203(k) loan isn’t for everybody. As Capalad found out the hard way, the money you save is often more than made up in sweat equity.

“I was making calls during my lunch break, and my husband was regularly stopping at the house to check in on things,” she said. “It really felt like our lives stopped for those 10 months.”

But McKeon said that if you have a creative eye and you’re willing to put in the work, you can end up with a much better home than you would have been able to purchase if you limited yourself to move-in ready properties, especially if you have a limited amount of cash to bring to the table.

In the end, it’s all about understanding the trade-offs and doing what’s right for you and your family. At the very least, the 203(k) loan expands the realm of possibility.

The post Understanding the FHA 203k Loan appeared first on MagnifyMoney.

The States Most (and Least) Likely to Have Underwater Properties

Real estate or home mortgage crisis concept, copy space. Please check out my other real estate concept images in my portfolio. Thanks!

More than 5.4 million homes in the United States are “seriously underwater”—meaning the loan amount is 25 percent higher than the property’s market value. But which state has the most (or fewest) underwater homes? Is it yours?

Using the ATTOM Data Solutions property database, you can see the top 15 states in the US with the highest percentage of seriously underwater homes, as well as the 15 states with the lowest percentage.

See if your state made the top 15 with the most (or fewest) seriously underwater properties.

#15 Most Underwater Properties

Pennsylvania: 10.3% of properties are seriously underwater.

#14 Most Underwater Properties

Georgia: 11.2% of properties are seriously underwater.

#12 (Tie) Most Underwater Properties

Arkansas: 11.4% of properties are seriously underwater.

#12 (Tie) Most Underwater Properties

Connecticut: 11.4% of properties are seriously underwater.

#11 Most Underwater Properties

New Jersey: 12.1% of properties are seriously underwater.

#9 (Tie) Most Underwater Properties

Florida: 13.1% of properties are seriously underwater.

#9 (Tie) Most Underwater Properties

Maryland: 13.1% of properties are seriously underwater.

#8 Most Underwater Properties

Michigan: 13.3% of properties are seriously underwater.

#7 Most Underwater Properties

Delaware: 13.4% of properties are seriously underwater.

#6 Most Underwater Properties

Missouri: 14.2% of properties are seriously underwater.

#5 Most Underwater Properties

Indiana: 16.4% of properties are seriously underwater.

#4 Most Underwater Properties

Ohio: 16.5% of properties are seriously underwater.

#3 Most Underwater Properties

Illinois: 16.8% of properties are seriously underwater.

#2 Most Underwater Properties

Louisiana: 17.1% of properties are seriously underwater.

#1 Most Underwater Properties

Nevada: 17.4% of properties are seriously underwater.

#15 (Tie) Least Underwater Properties

Hawaii: 5.5% of properties are seriously underwater.

#15 (Tie) Least Underwater Properties

Texas: 5.5% of properties are seriously underwater.

#13 Least Underwater Properties

Wyoming: 5.4% of properties are seriously underwater.

#12 Least Underwater Properties

Montana: 5.0% of properties are seriously underwater.

#11 Least Underwater Properties

Colorado: 4.9% of properties are seriously underwater.

#10 Least Underwater Properties

Washington: 4.8% of properties are seriously underwater.

#9 (Tie) Least Underwater Properties

North Dakota: 4.7% of properties are seriously underwater.

#9 (Tie) Least Underwater Properties

Idaho: 4.7% of properties are seriously underwater.

#7 (Tie) Least Underwater Properties

Minnesota: 4.6% of properties are seriously underwater.

#7 (Tie) Least Underwater Properties

Massachusetts: 4.6% of properties are seriously underwater.

#5 Least Underwater Properties

Mississippi: 4.5% of properties are seriously underwater.

#4 Least Underwater Properties

Utah: 4.4% of properties are seriously underwater.

#3 (Tie) Least Underwater Properties

Oregon: 4.3% of properties are seriously underwater.

#3 (Tie) Least Underwater Properties

Vermont: 4.3% of properties are seriously underwater.

#1 Least Underwater Properties

Alaska: 4.0% of properties are seriously underwater.

Image: DS011

The post The States Most (and Least) Likely to Have Underwater Properties appeared first on Credit.com.

How to Get ‘Unstuck’ From Your Starter Home

Source: iStock

Andrew Cordell bought his first home at the worst possible time — 10 years ago, right before the housing bubble burst.

He’s not going to make that mistake again.

“We had immediate fear put in us as homeowners,” says Cordell, 40. “We know how dangerous this can be.”

So the small “starter home” he purchased in Kalamazoo, Michigan back in 2007 now feels just about the right size.

“When we bought, we figured we’d get another home in a few years,” he says. “But the more we settled, the more we thought, ‘Do we really need more space?’ We don’t actually need a large chest freezer or a large yard. Kalamazoo has a lot of parks.”

Apparently, plenty of homeowners feel the same way.

It’s a phenomenon some have called “stuck in their starter homes.” Bucking a decades-long trend, young homeowners aren’t looking to trade up — they’re looking to stay put. Or they are forced to.

According to the National Association of Realtors, “tenure in home” — the amount of time a homebuyer stays — has almost doubled during the past decade. From the 1980s right up until the recession, buyers stayed an average of about six years after buying a home. That’s jumped to 10 years now.

Expected Median in Tenure in Home
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

 

Other numbers are just as dramatic. In 2001, there were 1.8 million repeat homebuyers, according to the Urban Institute. Last year, there were about half that number, even as the overall housing market recovered. Before the recession, there were generally far more repeat buyers than first-timers. That’s now reversed, with first-time buyers dwarfing repeaters, 1.4 million to 1 million.

This is no mere statistical curiosity. Trade-up buyers are critical to a smooth-functioning housing market, says Logan Mohtashami, a California-based loan officer and economics expert. When starter homeowners get gun-shy, home sales get stuck.

“Move-up buyers are especially important … because they typically provide homes to the market that are appropriate for first-time buyers,” he says. When first-timers stay put, the share of available lower-cost housing is squeezed, making life harder for those trying to make the jump from renting to buying.

Getting unstuck from your starter home

There are plenty of potential causes for this stuck-in-a-starter-home phenomenon — including the fear Cordell describes, families having fewer children, fast-rising prices, and flat incomes. But Mohtashami says the main cause is a hangover from the housing bubble that has left first-time buyers with very little “selling equity.”

Buyers need at least 28 to 33 percent equity to trade into a larger home, and often closer to 40 percent, he says. Those who bought in the previous cycle might have seen their home values recover, but many purchased with low down payment loans, leaving them still equity poor.

That wasn’t such a problem before the recession, as lenders were happy to give more aggressive loans to trade-up buyers. Not any more.

“In the previous cycle you had exotic loans to help demand. Now you don’t. [That’s why] tenure in home is at an all-time high,” Mohtashami says. “Even families having kids aren’t moving up as much.”

Fast-rising housing prices don’t help the trade-up cause either. While homeowners would seem to benefit from increases in selling price, those are washed away by higher purchase prices, unless the seller plans to move to a cheaper market.

“You’re always trying to catch up to a higher priced home,” Mohtashami says.

Cassandra Evers, a mortgage broker in Michigan, says she’s seen the phenomenon, too.

“It’s not for lack of want. It seems to be the inability to afford the cost of the new home,” she says. “It’s not the interest rate that’s the problem, obviously because those are at historic lows and artificially low. It’s because to buy a ‘bigger and better house,’ that house costs significantly more than their current home. The cost of housing has skyrocketed.”

U.S. Homebuyers and Student Loan Debt (by Age)
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

There’s also the very practical problem of timing. In a fast-rising market, where every home sale is competitive, it’s easy to lose the game of musical chairs that’s played when a family must sell their home before they can buy a new one.

“Folks are concerned about selling their current house in one day and being unable to find a suitable replacement fast enough,” Evers says.

Cordell, who lives with his wife and eight-year-old son, says the family considered a move a few years ago and briefly looked around. But they quickly concluded that staying put was the right choice.

“We looked at some homes and we thought, ‘I guess we could afford that. But we don’t want to be house broke’,” he says. “We don’t want to take on so much debt that ‘What else are we able to do?’ What if one of us loses our job? I guess you could say we have a Depression-era sensibility. … Who would want to get upside down on one of these things?”

The Urban Institute says this stuck-in-starter-home problem shows a few signs of abating recently. Repeat buyers were stuck around 800,000 from 2013 to 2014. Last year, the number pierced 1 million. But that’s still far below the 1.5 million range that held consistently through the past decade.

There are other signs that relief might be on the way, too. ATTOM Data Solutions recently released a report saying that 1 in 4 mortgage-holders in the U.S. are now equity rich — values have risen enough that owners hold at least 50 percent equity, well above Mohtashami’s guideline. Some 1.6 million homeowners are newly equity rich, compared to this time last year, and 5 million more than in 2013, ATTOM said.

“An increasing number of U.S. homeowners are amassing impressive stockpiles of home equity wealth,” says Daren Blomquist, senior vice president at ATTOM Data Solutions.

So perhaps pent-up repeat homebuying demand might re-emerge. Evers isn’t so sure, however.

“Most folks I talked with are no longer interested in being house poor and maxing out their debt to income ratios. They seem to be staying put and shoving money into their retirement accounts,” Evers says.

The Cordells are content where they are in Kalamazoo and plan to stay long term. If anything would make them move, it’s not growing home equity but a growing family.

“If we ended up with a second (kid), I suppose we’d have to look,” Cordell mused. “But we have no plans for that.”

4 Signs You’re Ready to Trade Up Your Home

  • YOU’VE GOT PLENTY OF EQUITY: Your home’s value has risen enough that you safely have at least 28 percent equity and, preferably, more like 35 to 40 percent.
  • YOU’RE EARNING MORE: Your monthly take-home income has risen since you bought your first home by about as much as your monthly payments (mortgage, interest, insurance, taxes, condo fees, etc.) would rise in a new home.
  • YOU STAND TO MAKE A HEALTHY PROFIT: You are confident that if you sell your home, you’d walk away from closing with at least 30 percent of the price for your new home — or you can top up your seller profits to that level with cash you’ve saved for a new down payment. That would let you make a standard 20 percent down payment and have some left over for surprise repairs and moving costs that will come with the new place. Remember, transaction costs often surprise buyers and sellers, so be sure to build them into your calculations.
  • YOU CAN HANDLE THE RISK: You have the stomach for the game of musical chairs that comes with selling then buying a home in rapid succession. Also, if you are in a hot market, you have extra cash to outbid others or a place for your family to stay in case there’s a time gap between selling and buying.



The post How to Get ‘Unstuck’ From Your Starter Home appeared first on MagnifyMoney.

How to Get ‘Unstuck’ From Your Starter Home

Source: iStock

Andrew Cordell bought his first home at the worst possible time — 10 years ago, right before the housing bubble burst.

He’s not going to make that mistake again.

“We had immediate fear put in us as homeowners,” says Cordell, 40. “We know how dangerous this can be.”

So the small “starter home” he purchased in Kalamazoo, Michigan back in 2007 now feels just about the right size.

“When we bought, we figured we’d get another home in a few years,” he says. “But the more we settled, the more we thought, ‘Do we really need more space?’ We don’t actually need a large chest freezer or a large yard. Kalamazoo has a lot of parks.”

Apparently, plenty of homeowners feel the same way.

It’s a phenomenon some have called “stuck in their starter homes.” Bucking a decades-long trend, young homeowners aren’t looking to trade up — they’re looking to stay put. Or they are forced to.

According to the National Association of Realtors, “tenure in home” — the amount of time a homebuyer stays — has almost doubled during the past decade. From the 1980s right up until the recession, buyers stayed an average of about six years after buying a home. That’s jumped to 10 years now.

Median Tenure in Home by Age
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

 

Other numbers are just as dramatic. In 2001, there were 1.8 million repeat homebuyers, according to the Urban Institute. Last year, there were about half that number, even as the overall housing market recovered. Before the recession, there were generally far more repeat buyers than first-timers. That’s now reversed, with first-time buyers dwarfing repeaters, 1.4 million to 1 million.

This is no mere statistical curiosity. Trade-up buyers are critical to a smooth-functioning housing market, says Logan Mohtashami, a California-based loan officer and economics expert. When starter homeowners get gun-shy, home sales get stuck.

“Move-up buyers are especially important … because they typically provide homes to the market that are appropriate for first-time buyers,” he says. When first-timers stay put, the share of available lower-cost housing is squeezed, making life harder for those trying to make the jump from renting to buying.

Getting unstuck from your starter home

There are plenty of potential causes for this stuck-in-a-starter-home phenomenon — including the fear Cordell describes, families having fewer children, fast-rising prices, and flat incomes. But Mohtashami says the main cause is a hangover from the housing bubble that has left first-time buyers with very little “selling equity.”

Buyers need at least 28 to 33 percent equity to trade into a larger home, and often closer to 40 percent, he says. Those who bought in the previous cycle might have seen their home values recover, but many purchased with low down payment loans, leaving them still equity poor.

That wasn’t such a problem before the recession, as lenders were happy to give more aggressive loans to trade-up buyers. Not any more.

“In the previous cycle you had exotic loans to help demand. Now you don’t. [That’s why] tenure in home is at an all-time high,” Mohtashami says. “Even families having kids aren’t moving up as much.”

Fast-rising housing prices don’t help the trade-up cause either. While homeowners would seem to benefit from increases in selling price, those are washed away by higher purchase prices, unless the seller plans to move to a cheaper market.

“You’re always trying to catch up to a higher priced home,” Mohtashami says.

Cassandra Evers, a mortgage broker in Michigan, says she’s seen the phenomenon, too.

“It’s not for lack of want. It seems to be the inability to afford the cost of the new home,” she says. “It’s not the interest rate that’s the problem, obviously because those are at historic lows and artificially low. It’s because to buy a ‘bigger and better house,’ that house costs significantly more than their current home. The cost of housing has skyrocketed.”

U.S. Homebuyers and Student Loan Debt (by Age)
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

There’s also the very practical problem of timing. In a fast-rising market, where every home sale is competitive, it’s easy to lose the game of musical chairs that’s played when a family must sell their home before they can buy a new one.

“Folks are concerned about selling their current house in one day and being unable to find a suitable replacement fast enough,” Evers says.

Cordell, who lives with his wife and eight-year-old son, says the family considered a move a few years ago and briefly looked around. But they quickly concluded that staying put was the right choice.

“We looked at some homes and we thought, ‘I guess we could afford that. But we don’t want to be house broke’,” he says. “We don’t want to take on so much debt that ‘What else are we able to do?’ What if one of us loses our job? I guess you could say we have a Depression-era sensibility. … Who would want to get upside down on one of these things?”

The Urban Institute says this stuck-in-starter-home problem shows a few signs of abating recently. Repeat buyers were stuck around 800,000 from 2013 to 2014. Last year, the number pierced 1 million. But that’s still far below the 1.5 million range that held consistently through the past decade.

There are other signs that relief might be on the way, too. ATTOM Data Solutions recently released a report saying that 1 in 4 mortgage-holders in the U.S. are now equity rich — values have risen enough that owners hold at least 50 percent equity, well above Mohtashami’s guideline. Some 1.6 million homeowners are newly equity rich, compared to this time last year, and 5 million more than in 2013, ATTOM said.

“An increasing number of U.S. homeowners are amassing impressive stockpiles of home equity wealth,” says Daren Blomquist, senior vice president at ATTOM Data Solutions.

So perhaps pent-up repeat homebuying demand might re-emerge. Evers isn’t so sure, however.

“Most folks I talked with are no longer interested in being house poor and maxing out their debt to income ratios. They seem to be staying put and shoving money into their retirement accounts,” Evers says.

The Cordells are content where they are in Kalamazoo and plan to stay long term. If anything would make them move, it’s not growing home equity but a growing family.

“If we ended up with a second (kid), I suppose we’d have to look,” Cordell mused. “But we have no plans for that.”

4 Signs You’re Ready to Trade Up Your Home

  • YOU’VE GOT PLENTY OF EQUITY: Your home’s value has risen enough that you safely have at least 28 percent equity and, preferably, more like 35 to 40 percent.
  • YOU’RE EARNING MORE: Your monthly take-home income has risen since you bought your first home by about as much as your monthly payments (mortgage, interest, insurance, taxes, condo fees, etc.) would rise in a new home.
  • YOU STAND TO MAKE A HEALTHY PROFIT: You are confident that if you sell your home, you’d walk away from closing with at least 30 percent of the price for your new home — or you can top up your seller profits to that level with cash you’ve saved for a new down payment. That would let you make a standard 20 percent down payment and have some left over for surprise repairs and moving costs that will come with the new place. Remember, transaction costs often surprise buyers and sellers, so be sure to build them into your calculations.
  • YOU CAN HANDLE THE RISK: You have the stomach for the game of musical chairs that comes with selling then buying a home in rapid succession. Also, if you are in a hot market, you have extra cash to outbid others or a place for your family to stay in case there’s a time gap between selling and buying.



The post How to Get ‘Unstuck’ From Your Starter Home appeared first on MagnifyMoney.

How Real Estate Agents Use Your Favorite Restaurants to Sell Homes

If you love to eat, you'll want to check out our top picks for some of the best foods the world has to offer.

That pizza place down the street could make or break your home sale. The best real estate agents know how to use your favorite restaurants as evidence of a great neighborhood when they market your home to buyers—helping you get a faster sale and a better price.

Top real estate agent George Graham stands behind using your favorite haunts to your advantage when selling your home. He told us that “having great food options is definitely a consideration a person makes when buying in an urban location.”

How does your real estate agent use the trendy diner down the street to sell your house? We interviewed three top real estate agents to show you their tricks of the trade.

1. Seller’s Agents Talk Up Restaurants as a Big Part of the Community

Restaurants help create the pulse of a neighborhood. When buyers decide on a location, the neighboring restaurants and shops are an essential component to the life—and the energy—of the area they’re investing in. That’s why real estate agents often use the best restaurants in the area to advertise how great the home is. As Minneapolis real estate agent Alexander Boylan pointed out, agents are “not only selling a house, but they’re also selling a community.”

Boylan went on to say that real estate agents will often “advertise restaurants as a selling point for the home because of the walkability of the neighborhood.”

That isn’t just the case in Boylan’s market. Graham told us that many buyers are concerned with the walkability of a listing. He said that pointing out “the close proximity to great shopping, food, and restaurants is helpful, especially if you are dealing with a downtown location.”

Elizabeth Weintraub, a top-performing seller’s agent in Sacramento, even tried out the top Mexican joint in the neighborhood of her latest listing and wrote about it on her blog.

She writes, “The location is perfect. Imagine living a half block away from William Land Park. It is also close to Starbucks and a terrific Mexican restaurant with outdoor dining, Dali’s Kitchen. . . . The point is, if I lived at this home with a view of William Land Park, I would be dining almost nightly at Dali’s Kitchen.” Weintraub specifically calls out the name of the restaurant to advertise how close that house is to delicious food.

Agents use your favorite neighborhood restaurants to market your house and its community in a few ways:

1. They call out five-star restaurants or hole-in-the-wall treasures in the listing description.
2. They tell buyer’s agents the top restaurants they can tell their clients about.
3. They talk up amazing eats at the open house.

In your next meeting with your real estate agent, tell them about your favorite restaurants in the area. They can use those trendy or quaint spots to advertise your house and your neighborhood’s charms.

2. Buyer’s Agents Meet Clients at Restaurants to Show Off the Location

Buyer’s agents will use restaurants to show off the location and help their clients settle on a house. Realtor® Alex Boylan told us, “Sometimes when I have a first-time client meeting and I know they want to be in a certain area, we’ll meet at the coffee shop or the local restaurant and I’ll tell them, ‘This is a part of the community!’ That is a selling point for the community they want to be in.”

This immersion in the neighborhood helps buyers get a solid grasp of its vibe and culture. It’s similar to exploring a city for the first time—you wouldn’t visit the tourist traps to get to know what it’s really like. You’d walk up and down the city’s streets, find a coffee shop, and sit there for a while. That’s what buyer’s agents do to give their clients a more complete picture of the area.

Boylan even goes the extra mile and “buys gift cards for the clients as welcome home gifts for moving into the neighborhood so they can visit their local restaurants.”

The best way you can get buyer’s agents to show their clients the great restaurants in your area is to communicate with your own real estate agent. They can talk to top buyer’s agents at their firm and in the area to make sure they know the hot spots and family-friendly joints perfect for a coffee meeting that shows off the neighborhood.

3. Seller’s Agents Use Restaurants to Attract Buyers with Active Social Lives

Restaurants are an important part of social life for millennials, and nearby eateries are also a big draw for couples and families who take their kids out to eat after school or after activities on the weekend. Without nearby spots, these clients are forced to travel farther to meet up with friends or for a great meal, which isn’t ideal.

According to Weintraub, showing off the great restaurants in the area can be a big draw for millennials who brunch and party at the local haunts with their friends. She told us that “properly marketed, a hot-spot restaurant or even a trendy hole-in-the-wall near a group of homes is a big selling benefit to many millennials today. That particular buying group likes to meet friends at restaurants and watering holes. That’s their social life. They generally do not entertain at home.”

Take note of which restaurants you think your agent should use to market to specific types of buyers. For example, the pasta place with delicious spaghetti and paper tablecloths the kids can draw on is a great place to show off to families. The trendy bar-restaurant combo with the best cocktail in town is perfect for nightlife-hungry millennials. It really depends on your area, and your agent will know the type of buyer you’ll need to woo.

Your Local Food Scene Is One of Your Property’s Greatest Assets

The best way you can take advantage of your favorite restaurants is to tell your real estate agent about them. Though they will be a local expert and probably have a good idea of which eats are the best, they won’t know exactly which ones are your favorite and why. So tell your agent about the hole-in-the-wall diner that you love because your kids love the apple pie. Specifics like that help agents market your house even better.

As Boylan told us, telling buyers about the best restaurants really says, “Hey welcome to the community—now go enjoy it!”

Once you’ve successfully sold your own home by leveraging the power of your local eateries, you may be in the market for a new home—and a new mortgage. Find out everything you need to know about mortgages in our Mortgage Learning Center.

Image: mactrunk

The post How Real Estate Agents Use Your Favorite Restaurants to Sell Homes appeared first on Credit.com.