Financing a Home Purchase

Each year, for five seasons, I showed a couple an array of summer rentals which they would rent for Memorial Day to Labor Day. The rental market was gradually shifting from a full season market to short term, and there were fewer options in their price range. Their sweet spot was the quintessential cedar shake farmhouse with vintage appointments, popular with other rental customers as well.

I finally asked them if they would consider purchasing a home, since they would be in residence a quarter of the year. They said they had been trolling sale listings but there were no farmhouses that appealed to them in their price range. I told them about a well maintained ranch that already had their favorite cedar shingle siding located close to the beach, and if they financed the purchase, it could cost them less than $3K per month with property taxes and insurance rolled in, close to what they were paying for a seasonal rental. They toured the home and agreed that the price and location were compelling, and although it was not their style, they proceeded to purchase with a conventional 30-year fixed rate mortgage. The final monthly cost wound up being less than $2700 per month. They recently said “buying this home was the best investment we have ever made.”

I sat down this week to discuss current trends in financing real estate with my two go-to mortgage contacts, Eve Robin Jarrett, of GuardHill Financial, which is a Mortgage Lender as well as a Mortgage Broker, and Michael Jacobs, who is a Mortgage Banker for a major lending bank. Over the years, both Eve and Mike have not only facilitated, but also saved many a transaction with their keen insight to financing, based on a customer’s personal portfolio and goals.

“Interest rates are still very low, particularly when taken in an historical perspective,” Mike told me. “Conventional conforming and Jumbo rates are generally in the high 3s and low 4s depending on the bona fides of the individual applicants.” Eve added that, “Since the Fed began increasing the Fed Fund Rate on December 16th 2015, there have been four .250% Point Rate Hikes for a total increase of 1%.”

When submitting an offer to purchase a property, prospective buyers who are planning to finance present a pre-approval from a lender or mortgage broker, outlining the extent to which the buyer’s financials have been reviewed, the amount that the bank is willing to lend, and the type of mortgage that has been requested. “When pricing out a loan, a lender needs to take into consideration the FICO or credit score, loan-to-value ratio and occupancy as well as the size of the loan,” Eve said.

With regard to “occupancy,” primary residence, second home and investment property are three types of loans frequently used in our market, each with its own set of requirements. “Generally, rates for primary residences and second homes are the same,” Mike said,” however where you can usually finance 90% or more for the purchase of a primary home, the loan-to-value (the percentage of the purchase price that you can borrow) for a second home may be limited to no more than 80% or 90% depending on loan amount. Purchases of investment property, a property that will not be occupied by the borrower but is held for rental income or value appreciation, will have higher rates and more limited loan-to-value. Experience over many years and many loans indicate that this type of purchase presents greater risk of default to a lender and it is, after all, a business investment. Lenders are more comfortable when the purchaser has more ‘skin in the game.’”

Over the last few years, I have worked with customers who have obtained FHA loans which seem to have distinct advantages. “The Federal Housing Administration (FHA) a division of the Department of Housing and Urban Development (HUD) provides insured financing for the purchase of primary residences and usually for a category of borrowers who have not saved enough for a large down payment,” Mike explained.

“Recently I have seen an increase in inquiries for FHA loans,” Eve said, “which in our area can go as high as 96.5% Financing for a single family residence, a Primary Residence Purchase with a loan amount of 636,150.00.” “FHA will finance up to 96.5% of the purchase price,” Mike added, “BUT it also applies an upfront mortgage insurance premium AND a monthly mortgage insurance premium.”

I had a transaction where the buyer wanted to finance the home but also install a pool and she did not have the upfront costs for the installation, a renovation. For this she applied for a renovation loan. “Renovation financing can be used for new purchases or refinance,” Mike explained. “The key difference between conventional and renovation loans are that reno loans calculate loan amount and loan-to-value against the “as complete” value of the home, after the renovations have been completed. This is based on the contract with the renovation contractor, plans and specs.”

Cash is, of course, “king,” as they say, however with interest rates still competitive, many customers who have cash in hand choose to obtain a loan. One recent customer exclaimed that “with money available at such low interest rates, I can buy more than one property!”