Cash-Out Refinance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Homeowners Need to Know

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

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

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

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

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

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

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

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No Need to Make Common Mistakes

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

Pricing too high

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

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

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

Failure to do Market Preparation

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

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

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

Thinking the agent doesn’t matter

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

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

Being present during showings

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

Not letting your agent negotiate for you

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

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

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

Not responding to offers in a timely manner

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

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

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

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

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A Lesson from a Pro

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

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

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

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

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Equity, Price and the Agent You Select

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A Seller’s equity in their home is the difference between what the home is worth and what they owe. At any point in time, it is an estimation because value is a very subjective term. If the seller thinks the home is worth more than an actual buyer will pay for it, the estimated equity is too high. If a buyer is willing to pay more than the seller believes the home is worth, the estimated equity is too low.

A true determination of equity becomes more objective when the home is sold, and the value is solidified by the sales price. This value is determined by negotiations between a seller and buyer and eliminate speculation and conjecture because money and title are being exchanged.

The equity being defined above is more accurately referred to as Gross Equity. After the ordinary and necessary expenses connected with the sale of a property are deducted from the sales price, along with any mortgage balance and/or liens, the proceeds are referred to as Net Equity.

Like in business, the goal is to maximize revenue and minimize expenses, the same is true in selling a home. The goal is to achieve the highest possible sales price while keeping the expenses as low as possible.

Setting the price of a home is ultimately, the seller’s decision. It is critical because not only will it impact the amount of proceeds the seller realizes, but it can also affect the length of time it takes to sell, how much activity it will generate from buyers, and eventually, whether it sells at all.

The cost of a home is what the seller paid for it and the improvements made. Cost has no relationship to value. Market value is the most probable price willing and informed buyers and sellers can agree upon in a competitive market in a reasonable period.

Price the home too low and the seller has unrealized proceeds. Price it too high and it eliminates interested buyers.

Preparing the home to go on the market has expenses involved. Things like painting the front door or adding landscaping to increase the initial appeal is an investment to attract the buyer’s attention. While it may not add value to the home, it is an important element.

Decluttering the home takes time and may even involve temporarily renting a storage facility for things that may make your home feel smaller or detract from making your home as visually appealing as possible.

There are obviously selling expenses involved in the sale of a home which can vary based on the price of the home, what is customary in your area and negotiations in the sales contract. Your agent can advise you on these so that you don’t pay anything out of the ordinary and can provide you an estimate of what is to be expected.

Your real estate professional can provide you the information necessary to decide on price. However, do not confuse your decision on whom to market your home by the price indicated by the market and reported by the agent.

The market determines the value, and the seller sets the price. Your decision in selecting an agent should be based on trust, reputation, integrity, and the ability to execute a successful marketing plan.

In today’s market, on average, homes, are selling in 17 days and sellers are seeing an average of five offers. It is not uncommon for homes to sell for more than the list price, assuming they are not priced dramatically over the market initially.

Discuss with your real estate professional pricing your home slightly below market value and using a “coming soon” promotion to encourage increased buyer interest and possibly, encourage multiple offers.

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Rising Rents – Music to Your Ears?

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Rents going up may not be pleasant to hear for tenants, but it could be music to your ears if you are an investor.

The recent CoreLogic Single-Family Rent Index, April 2021, showed a 5.3% increase in national rent year over year which doubled the increase experienced in April 2020. This is the largest annual rent price increase in nearly 15 years.

Interestingly, detached rentals are experiencing an even higher growth rate of 7.9% year over year compared to the 2.2% annual rate for attached rentals. This is supported by the CoreLogic report that half of millennials and 2/3 of baby boomers “strongly prefer to live in a single, stand-alone home.”

From an investor’s point of view, single-family rentals offer large loan-to-value mortgages at fixed interest rated for long terms on appreciating assets with definite tax advantages and reasonable control.

Rentals are considered to be the IDEAL investment because if offers income to offset the carrying cost of the investment; depreciation contributing to annual cash flows with a non-cash deduction; equity build-up because a portion of each payment is applied to principal reduction; appreciation with increases in value; and, leverage that increases the overall yield through the use of borrowed funds.

Most homeowners are very aware of the housing inventory shortage that has caused homes to rise over 12% in the past year. The increased demand for homes coupled with the shortage of supply has contributed to the rapid appreciation. The trend is expected to continue for years.

While appreciation is a large component to the rate of return, cash flows are bolstered by the increasing rents. This combination makes investments in single-family rentals very attractive.

An added appeal is the familiarity and understanding of this type of investment because it requires the same aspects as homeownership. The same service providers a person uses for their home can be used for the rentals. For the investors who don’t want to manage the property themselves, professional management is available for placing and qualifying a tenant only or the entire process including collecting the rent and maintenance.

For more information, download the Rental Income Properties. Contact me if you’d like to have a more in-depth conversation and address any personal questions you might have.

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Homeownership Cycle and Inventory

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An interesting homeownership cycle begins with a starter home and progresses to larger and smaller homes throughout a person’s lifetime. Within a few years after purchasing their initial home, they might move up to a little larger house. The reasons could be that they simply want a larger home and can afford it, or their increased family size may be motivating the move.

While the children are small, they can probably get by with less space but as they grow and behave more like adults, even though they may not be, the need for more room becomes more pressing. Depending on the size of the family, this will last some time and then, as they go off to college, enter the work force and find their own living space, the parents may find that they no longer need the larger home.

In the interest of saving money or possibly convenience, they migrate from a larger home to a smaller home until they consider an assisted living facility or possibly, a nursing home. Another alternative, many homeowners are electing is to move in with their children or other family members. Some homeowners are even retro-fitting their homes with equipment and safety devices that will allow them to continue to live in their homes in old age.

According to the American Community Survey, a person in the United States can expect to move 11.7 times in their lifetime. When that person is 18 years old, they can expect to move another 9.1 times and by age 45, they can expect another 2.7 moves in their lifetime.

One of the suspected reasons affecting the low housing inventory in America at this time is the group of homeowners who would move but are reluctant because the home will sell and with the shortage of homes, they may not be able to replace it with what they want.

The fact that builders have not kept up with the demand in the past twenty years has been a major contributor to the low inventory that housing is currently experiencing. It is estimated that it will take two million new homes a year for the next decade to get caught up, assuming demand doesn’t increase.

There are also other factors involved like the fact that since 2007, the owner’s tenure in their home has more than doubled from five years to 10.6 years. People are staying in their homes longer which means the homes are not coming on the market for sale.

Another consideration is that sellers with extremely low mortgage rates are reluctant to buy another house which would have to be financed at a higher rate than they are currently paying.

Regardless of where you are in the homeownership cycle, your agent can provide important information and experience that is essential to making a smooth move. Having the facts reduces the risk of unexpected outcomes.

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Mortgage Forbearance

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Some homeowners who could not afford to make their mortgage payments this past year have been relieved to find out that their mortgage servicer or lender allowed them to pause or possibly, reduce their payments for a limited period. While it does relieve the financial pressure, it is a temporary remedy.

About 2/3 of the people who entered forbearance during the pandemic have exited the program. There are only a little over two million homeowners remaining in forbearance.

It is important for owners who find that they cannot make the payments on their mortgage to contact their lender and request a forbearance. If you stop making mortgage payments without a forbearance agreement, the servicer will report this information to the credit reporting companies, and it can have a lasting negative impact on your credit history. Without going through that process, the lender assumes you are delinquent, and protections afforded under forbearance may not apply.

Forbearance does not forgive the money that is owed. The borrower must repay any missed or reduced payments in the future. If forbearance was issued under the CARES Act, the lender cannot require payment in full at the end of the forbearance. Additionally, Fannie Mae has declared “following forbearance, you are not required to repay missed payments all at once, but you have that option.”

The forbearance agreement issued by the lender allows a borrower to avoid foreclosure for a period until, hopefully, the borrower’s financial situation improves. If at the end of the stated period, the borrower’s hardship still exists, the lender may be able to extend the time frame.

The provisions of the forbearance vary based on the type of mortgage. The lender can tell you the specific provisions and options.

Loans made by Fannie Mae and Freddie Mac require lenders to suspend reports to credit bureaus of past due payments for borrowers in a forbearance plan and no penalties or late fees will be assessed. Furthermore, the lender is mandated to “work with the borrower on a permanent plan to help maintain or reduce monthly payment amounts as necessary, including a loan modification.”

At the end of the forbearance, there can be several options available to repay the suspended or paused amounts. You can resume your normal payment and repayment plan can be established. If you can start making the payment but can’t afford additional payments, the missed payments could be added to the end of the loan or possibly, a secondary lien that is due and payable when you refinance, sell or terminate your mortgage.

In cases where the borrower can’t afford to make the regular payments, a loan modification may be available with lower payments, but the term would be extended. While the CARES Act does not require borrowers at the end of the forbearance period to repay skipped payments in a lump sum, if a borrower is able, they may do so.

The purpose of this is to re-establish a payment plan that the borrower can repay the money owed. To be eligible for a loan modification, borrowers must show they cannot make the current mortgage payments because of financial hardship while demonstrating they can meet their obligations with the proposed restructured terms.

Under the CARES Act, borrowers with a GSE-backed mortgage are entitled to an additional 180-day extension which would be a total of 360 days. It is necessary to contact the servicer/lender for the extension.

There can be both legal and tax issues concerning in forbearance and professional advice is recommended. A list of U.S. Department of Housing and Urban Development approved Counseling agencies are available.

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Selecting the Right Agent in a Seller’s Market

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Even in the current, low inventory housing market, sellers are resisting the urge to sell it themselves and still seeking the help of a real estate professional. It may be more important than ever and there is too much at stake to risk going it alone.

The number of people attempting to sell on their own has been in steady decline since 2003 from 14% to 8% in the latest Profile of Home Buyers and Sellers produced by the National Association of REALTORS®.

The most frequently mentioned difficulties that owners who decided to sell it without the benefit of an agent included preparing the home for sale, understanding, and performing the paperwork, getting the price right and selling it within the length of time planned. Another commonly cited challenge was having enough time to devote to all aspects of the sale.

The other nine out of ten homeowners who are selling are many times faced with the question: “How do I determine which agent to use?” In some situations, owners know more than one agent and the dilemma becomes picking the right person for the job.

To get the answers that will lead to selecting the right agent, an owner needs to ask the right questions. Open-ended questions will give you a more descriptive answer that can bring clarity to your decision. Questions that begin with who, what, when, where, why and how will elicit a much more robust answer.

The following suggestions should be helpful for homeowners considering selling:

  • How long have you been selling homes and is this your full-time job?
  • What designations or other credentials do you have?
  • How many homes did you and your company sell last year?
  • What is your average market time compared to MLS and your top competitors?
  • What is your sales price to list price ratio?
  • When will you report to me on the progress of my transaction?
  • Who can you recommend for service providers like mortgage, inspections, repairs, and maintenance?
  • Why do you want to work with me?
  • Where are the opportunities to expose my home to the largest market?
  • What is your marketing plan for my home?

In today’s market, homes, on average, are selling in 17 days and sellers are seeing an average of five offers. It is not uncommon for homes to sell for more than the list price, assuming they are not priced dramatically over the market in the first place.

Specific to today’s market, additional questions to help you identify the best agent for the job could include:

  • With the shortage of homes on the market, is it necessary to update in advance?
  • In this competitive market, is staging the home important?
  • What are your thoughts on professional photography and video?
  • Is there a way to stimulate competition among to buyers?
  • Explain to me range of pricing and how it applies to home search on the Internet.
  • Can you profile the most likely buyer for my property?

Don’t think of these things as being an interrogation but more like an interview. That is exactly what it is; you are trying to find out how this prospective agent is going to handle some of the intricacies in the selling process that can affect the successful sale of your home.

After evaluating the answers you receive, you will either move forward to have this agent represent you or you move in a different direction. A third option, from our perspective, that occasionally develops is that we determine that we may not be able to manage the outcome that you are expecting.

Selecting the right agent to represent you, even in a Seller’s market, is an important decision and you need to have all the help you can get making the right one. We’re happy to provide the answers you want and need and will disqualify ourselves if we believe that it is not in your best interest. Our reputation depends on satisfactory results from every transaction we handle.

Download our Sellers Guide.

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