PURCHASE INSIGHT

Purchasing A New Home

Buying a new home is one of the most exciting moments one will experience. Whether you are a first time home buyer or an experienced investor we are committed to finding you the best possible terms while making the process fast and easy with no surprises.

1st & 2nd Homes:

There are different qualification standards depending on what you plan to use the property in question for. It is important to identify what you will be using the home for because this classification will have an effect on the loan terms and guidelines:

A 1st Home (primary residence) is the home in which you will be residing; it does not refer to the order in which you purchased your schedule of real estate.

A 2nd Home (vacation home) is a home that is located in a destination location, in which you will be visiting for approximately two weeks out of the year. You are not allowed to collect rent during the remainder of the year, doing so would reclassify a 2nd home as an investment property. Terms for second homes are similar to primary residences.

Investment Properties:

Investment property is the third and final type of home classification. An investment property is any home in which you plan on making income off of, or a home that is not classified as your primary residence or second home. The point is income does not have to be collected for a home to be categorized as an investment property.

Investment properties allow income collected for their use to be included why being qualified.
For this reason investment property qualification differs from primary or second home financing. Qualification is usually more difficult and the terms are not quite as favorable as primary and second home financing.

Due to a more complex schedule of real estate and stricter standards working with a specialist familiar to investment property financing is a must.

First Time Home Buyer:

If you are new to the real estate market, contacting a professional to answer your questions and secure financing is imperative. As a first time home buyer you should expect your broker to assist you in:

-Learning the process and understanding the details of homeownership.
-Embracing your home as an investment.
-Discussing the advantages and disadvantages of the loan programs.
-Identifying the right lending institution for you.
-Evaluating your plans for the future and how homeownership fits in.
-Learning your rights as a homeowner.
-Maximizing potential for first-time home buyer programs.
-Avoiding pitfalls that could cost you more money than is necessary.
-Minimizing the time needed to close.
-Meeting the sale contract requirements.
-Determining contract contingencies.

Having a broker handling your financing as a first time home buyer means a second set of experienced eyes on your important contractual paperwork for your new home purchase.

Down Payment:

There are many options available for people interested in putting a down payment on a new home purchase. The requirements for down payment vary depending on specific program guidelines, from zero money down to a 30% down payment requirement. Acceptable sources of down payment include:

-Personal savings, in the form of stocks, bonds, checking, savings, etc…
-Borrowing against your 401K plan.
-Down Payment Assistance Programs.
-Equity from recent home sale.
-Gift funds.
-Borrowed funds.
-Bonus
-Awards
-Inheritance

Depending on how you plan on making your down payment, there are various requirements for each of these options listed. Discuss your down payment options early with your loan consultant – programs can be effected by the down payment option you choose.

100% Financing, Zero Down Payment:

Popular in the early millennium, zero down payment loans offer the borrower the ability to finance the entire purchase price. Inherently risky due to the lack of equity position, 100% financing programs require a long term investment strategy. There are many ways to accomplish 100% financing which include:

-One loan for 100% (will have private mortgage insurance).
-One loan for 100% (will have lender paid mortgage insurance).
-80/20… two loans the first for 80%, the second for 20% totaling 100% (no mortgage insurance).
-VA (Veterans Administration) 100% guaranteed financing (must be a veteran with certificate of eligibility).
-USDA rural home loans offering up to 102% financing.

Conventional Financing:

Loans that meet Fannie and Freddie guidelines and qualify for secondary market servicing are known as conventional loan products. This is the largest segment of the real estate finance market and where most people find there purchase financing.

-Loan amounts of 417,000 or below.
-Loan amounts between 417,000 and 729,250.
It should be noted that these are temporary loan limits and could change in the future.

Because there are so many different lending institutions in this market, finding a lender that has the most competitive rate, with the simplest approval process can be a daunting task. This is a market in which brokers shine.

Government Loans:

In certain instances taking advantage of a government program may be the best choice for financing your new home purchase. We specialize in two types of government financing options:

-VA (Veterans Administration) Home Loans.
-USDA (United States Department of Agriculture) rural Home Loans.

Government programs have stricter standards for qualification than other loan programs and require additional paperwork, regardless they do currently offer solutions up to 102% financing for USDA and 100% financing for VA loans.

Jumbo and Super Jumbo:

Jumbo and Super Jumbo home loans are significantly different from conventional home loans. Loan amounts above 729,250 fall into the jumbo and superjumbo category. Due to the larger loan amount, if you are seeking a jumbo or superjumbo home loan expect slightly stricter qualifying standards and limited exceptions.

Residential loan amounts over 729,250 to 3,000,000.
20% to 25% or more, minimum equity position required.
Prepayment penalties common, but can opt out.
Program options are more restricted than conventional financing options.
Strict appraisal requirements.

Working with an experienced broker familiar to this market is highly recommended.

Leveraging:

Leveraging is the process of borrowing money (taking on debt), and using the proceeds to reinvest with the specific purpose of earning a higher rate of return than the cost of the money borrowed. Leveraging offers the chance of a larger return on investment; however the risk associated is higher due to a higher level of exposure. Leveraging is a popular tool among investors looking to use an equity position in one home as a means of purchasing additional real estate. Home Equity Lines of Credit are among the most popular financing vehicles used to accomplish leveraging. Make sure to assess the risk along with the benefit when discussing the option of leveraging.

1031 Exchange:

A 1031 exchange refers to specific tax law allowing someone to sell an investment property and reinvestment in another investment property of like kind without having to pay capital gains tax. Due to the nature of 1031 exchanges financing is usually not required unless the borrower is purchasing a more expensive piece of property than that they are selling. We do not offer specific services relating to 1031 exchanges, but can recommend a trusted specialist, and do assist clients with financing the purchase side of the 1031 exchange when the need arises. If looking into a 1031 exchange, make sure your real estate agent is familiar with all the facets of this market, and is familiar with the paperwork. Hiring a specialist that focuses explicitly on 1031 exchanges is highly advisable.

Out of State Investors:

If you are out of state and need someone familiar to the California real estate finance market, contact us immediately. Due to state specific laws and disclosures, working with a lender in your home state when the property and financing you will be securing is in California can cause unnecessary problems. Working with a lender in state will ensure all state regulations are met, and ensure a quick and easy financing process.

Why use a broker?

There are many reasons why people choose to secure financing through a finance broker as opposed to a bank. A broker:

- Has a fiduciary commitment to his or her clients.
-Knows which lenders focus on your loan niche, better pricing and terms.
-Has options banks do not have: brokers have the ability to flip your loan to other lenders if the terms warrant such action.
-Has market knowledge, and state licensing is required – no guarantee a bank representative is independently licensed.
-Broker originated loans out-perform retail (bank originated loans) two to one – less chance of default.
-No obligation or commitment required.
-Wholesale interest rates: brokers offer wholesale rates as opposed to retail rates offered by banks.
-Bid desks allow your broker to negotiate better terms on your behalf should rates come down.
-Mandatory disclosure of all commission made – banks can legally hide fees from you (thank their lobbyists).
-Ability to negotiate fees and their structure.

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