Should You Be a Borrower or Lender? The Return of the Personal Loan
As lending requirements stay relatively tight for most consumers, the chance of borrowing outside the banking system from family or friends can be attractive. After all, it's rare to see a parent or sibling demand a credit check or other lengthy documentation.
On the other hand, it could be one of the most dangerous financial transactions you ever make simply because money can drive a wedge between relatives in even the closest of families.
There are good and bad aspects to private loans. The good news first:
Terms can be significantly friendlier than a borrower would qualify for in the open market. For example, the rate charged on the loan can be higher than the lender would receive in a deposit account but lower than the borrower would pay a commercial lender.
They can require little or no collateral.
It's a way to keep money in the family.
It's a way for a borrower to be able to buy a home, a car or other critical assets even if they have a poor credit rating.
There's no loss of tax benefits to the borrower or lender if an agreement in the case of a mortgage loan is structured and reported properly.
Now the bad news
Unclear agreements can lead to missed payments or default.
If the borrower dies suddenly, the lender's investment may be lost if the agreement isn't structured correctly. A properly executed promissory note is still an obligation of the estate, and may continue to be paid to an heir or other person or entity based on the terms as agreed.
Jealous relatives could say they weren't treated fairly.
Disagreements between borrower and lender could kill an important relationship.
The best arrangements are formal - written in proper legal language, notarized and recorded in the county where the property resides. A financial advisor such as a CERTIFIED FINANCIAL PLANNERTM professional can talk to both parties about what such loans - particularly large loans for real estate or tuition - can mean for their respective finances. It also makes sense for both parties to visit their respective tax professionals to make sure they know the correct ways to document the loan transaction over time for tax purposes.
A detailed document prepared with the help of an attorney or a certified public accountant can also lay out specific scenarios if either the borrower or the lender has to break or alter their agreement. Such trained experts can talk you through the benefits and pitfalls of a private loan arrangement as it affects your particular situation (either as lender or borrower) and specific laws and requirements in your state you have to follow if both borrower and lender are going to derive tax advantages from the agreement.
You should be aware that the IRS governs these interest rates and provides an annually updated table that you can get at http://www.irs.gov/app/picklist/list/federalRates.html - these rates are Applicable Federal Tax Rates (AFR). You can also forgive a portion of the loan each year up the annual gift exclusion which is $13,000 this year.
Generally, any private loan transaction should include a promissory note that establishes how the debt will be repaid. That's true for business loans or loans for most types of property. In the case of a business loan, it makes sense for the potential borrower to get specific advice on how lenders in their business will be treated not only in terms of repayment, but default. These agreements are particularly important for tax purposes as well.
In the case of a loan made for real estate, a mortgage or "deed of trust" statement (depending on the state you live in) or an agreement specific to the type of loan that binds the property as collateral for the promissory note will be necessary. It basically says that if you don't fulfill all the terms in the agreement the lender has the right to foreclose or repossess the property.
Even if a friend or relative makes an offer of help, it's proper for the borrower to take the initiative to structure the arrangement in a way that's responsible and beneficial to both. If a relative is drawing income from the loan, special provisions should be made for prepayment and other contingencies.
The most important thing to remember and plan for? When two people who are close to each other enter into such an arrangement, the most valuable thing really isn't the money. It's the relationship.
February 2010 - This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by John Mazzara CFP http://www.Investments.mn 952-929-2577, a local member of FPA.
If you want to pursue investment property and need a hard money or private loan, we have outlets. For Twin Cities mortgage financing visit our MN mortgage site or visit our mn homes site to set up your MN MLS online search
The Clock is Ticking! Time is Running Out for Significant Savings!
Attention home buyers! Waiting to buy a home could cost you nearly $20,000 or more over a seven-year period if you time your purchase incorrectly. While the actual impact will vary depending on purchase price, the impact will certainly be significant because of stimulus programs scheduled to end in the coming months.
Economic turmoil and the real estate bubble have created significant opportunity for all those seeking to capitalize on the situation at hand. YOU Magazine will address the real estate purchase market and what people interested in both buying and selling a home need to know this month to take advantage of the current market conditions.
We also consulted with Michael J. Maher of "The Maher Team," one of the busiest agents in the country who sold 216 homes in 2009. With a degree in mathematics, he knows his numbers and the impact on both buyers and sellers.
As little as a few years ago, it would have almost been incomprehensible to expect that actions from Washington would impact decisions involving the purchase and financing of real estate. Well, that was then and this is now and the decisions people make or don't make stand to impact wallets across the country.
Before You Buy - Things to Consider The pressure is on to buy in the first quarter of 2010, so what should buyers focus on before pulling the trigger? Maher recommends that buyers focus on three things that are either expensive to fix later or unable to change without buying another home. His three primary areas to focus on are what he calls the three Ls: "Location, Lot and Layout."
When considering location, use technology like GoogleMapsTM before visiting a home to save both time and gas. Mapping allows you to view the property from different angles, see if the home is on a busy street, or if it offers the other requirements you need. For example, if you need a large yard where the kids or dogs can play, a tool like GoogleMapsTM will help you eliminate some homes immediately.
While it is relatively easy to get caught up in the aesthetics, don't do it. Overlook items you can change later like paint, carpet and other cosmetic details. Narrow your focus down to two or three homes and "all things being equal, focus on location, lot and layout."
Selling a Home? If you are selling a home and want to make sure you can get it off the market for time crunched buyers, remember that today is what Maher calls a "price war beauty contest." Sellers need to be focused on having their home priced competitively and making it most appealing upon inspection. Sellers also should consider paying for a home warranty to alleviate any concerns cash-strapped buyers may have about paying for repairs after closing.
More than anything else for both buyers and sellers this year, Maher suggests that people not let the money savings opportunities pass them by. "Anyone that qualifies is in a no-lose situation - they are buying at the bottom of the market, economically, historically, seasonally, market-wise and interest rate-wise. The perfect storm has arrived and the pearls and treasures have floated to the surface."
Gifts from the Federal Reserve Are on the Clock
MBS Purchase Program Mortgage rates have been artificially low the past fourteen months due to assistance from the Federal Reserve and their mortgage backed securities purchase program. Regardless of the expert, when asked what the impact has been to lowering rates, the range is from 0.50-1.00% or potentially more. The Federal Reserve reiterated in its January statement that they will be ending the program on March 31st.
While it is uncertain to what degree interest rates will immediately rise starting April 1st, the overwhelming trend will be higher. Many experts are predicting that rates will start to rise in advance of April 1st.
Tax Credit For Minnesota Buyers Low mortgage rates are not the only stimulus program ending in less than three months. Credited for boosting a major share of home sales at entry level, first time home buyers have been taking advantage of a tax credit of up to $8,000 for over a year.
Repeat purchasers were also given incentive in November with the availability of up to $6,500 in post-closing cash. Tax credit qualifying buyers have until April 30th to get under contract and must close by June 30th. If home buyers miss either date, it will be a costly one.
HUD and the FHA Tighten Up HUD announced in January that the upfront costs to obtain an FHA mortgage are going up for any applications received April 5th or later. The cost of the up-front mortgage insurance premium (MIP) will increase for all case numbers effective April 5th by 0.50%, from 1.75% to 2.25%.
What Waiting Will Cost You The costs of missing out on the combined incentives add up quickly for those who fail to act by the deadlines. The first incentive scheduled to end will impact buyers on a monthly basis in the form of higher monthly payments. On a $200,000 mortgage, a 1.00% increase to interest rates could increase a monthly payment by $125 a month or $10,500 over a seven-year period. Obviously, the longer the loan remains in place, the greater the impact of the potential loss.
The second potential loss that will be incurred would be waiting to obtain a mortgage guaranteed by the FHA. In the same example of borrowing $200,000, the upfront cost would be an additional $1,000, or .50% of the amount borrowed. While this cost may be financed, the impact to a monthly payment would also be an increase of approximately $5 a month and have to be accounted for later upon the sale of the property.
Finally, the third potential cost in waiting will be the end of the tax credit for qualified buyers of a primary residence, up to $6,500 for repeat buyers and up to $8,000 for first time home buyers.
Add all this up and the cost of choosing to wait could run up to nearly $20,000 or more depending on the purchase price of a home and the type of mortgage applied for. So, even if someone believes that home prices may fall from where they are today, even with a modest decline in price, the cost of waiting could outstrip any benefit of finding a home for less.
Those Who Wait Will Pay Thousands More This Spring
Waiting a few extra days or weeks to purchase a home this spring could cost buyers thousands of extra dollars as the office of Housing and Urban Development (HUD) implements several changes for loans guaranteed by the Federal Housing Authority (FHA).
Coming just weeks before the April 30 deadline for the Home Buyer Tax Credit and just days after the March 31 expiration of the Federal Reserve Board's mortgage backed securities purchase program (which has kept home loan rates artificially low for over a year), these FHA changes make it even more important to act now to save big.
Here are a few reasons why:
On April 5th, the cost of required up-front mortgage insurance for loans guaranteed by the FHA will increase from 1.75% to 2.25%. For a borrower purchasing a $200,000 home with a $7,000 down payment, the up-front mortgage insurance will increase by $965. Up-front mortgage insurance is typically financed in the final loan amount so the impact to a monthly payment will be minimal but overall, the increase is still borne by the borrower both upfront and monthly.
Later this spring, the amount of money that a seller can return to the buyer from their sale proceeds will be reduced from 6% to 3%. The reduction in these "seller concessions" can increase the amount of cash a buyer will be required to pay at closing by $6,000 for a home purchase of $200,000.
There is only one way to avoid being affected by all of these costly changes that lie ahead - submit all FHA mortgage applications by the last week of March.
If I can answer any questions you may have about how these changes could impact you, call me. I appreciate your business.
Yes-at least for now-it IS possible. It IS also available for first time buyers. If FHA is not an option or you want to contrast it with conventional option, consider this loan. Interest rates-which change daily and by the minute-were recently advertised at 3.75% for a 5/1 ARM. Imagine that payment!!
Here are some of the qualifying criteria:
95% financing maximum in one loan
1st Time buyers OK
700 minimum Fico score
Single Family and PUD's ONLY
41% maximum debt ratio
2 months of buyer payment reserves required
Seller CAN pay up to 3% of the closing cost
It this loan sounds interesting, give us a call. Outside the box thinking gets loans done. We provide mortgage financing in Minnesota only. Twin Cities Mortgage broker --Venture Development
I received an interesting email today from one of our lenders announcing the COMBO 1st/2nd mortgage was back!!! Wow-this means avoiding the mortgage insurance and their onerous underwriting. Here is a sneak preview of the terms. Call us about YOUR situation- Minneapolis mortgage broker
Criteria: Subject of course to changes at any time!!!
Must be a 2nd mortgage used in conjunction with a purchase-payment is set at 1% of the outstanding balance
Maximum 85% CLTV-(combined loan to value) Some states are set at 75 0r 80%. We only provide MN loans, so check to see where the program is at.
Maximum loan of 250K and all loans about 80% are subject to a current dollar advance limit
700+ middle credit score
Maximum Debt to income ratio of 45%
All appraisals must be ordered from the lender's approved appraisal company.
Will this loan work for everyone-NO. But is shows that lenders are assessing the market and willing to begin to get creative again. To me, it represents that the lenders feel that values have bottomed out. This is the first time I've seen second mortgages advertised by a lender in about 2.5 years!!
Finanally, some new products are becoming available. Here is one that works for bank owned properties.
Criteria: 80% loan to value conventional product for owner occupants. This product is from a large portfolio lender, so their guidelines do not follow Fannie Mae or Freddie Mac. This can be good or bad, depending on what criteria you may want to work around.
1st liens only--no second mortgages
appraisal must be lender ordered
foreclosure process must be completed
Full home inspection required in addition to an appraisal
Buyer's existing residence must be sold
Mechanics lien coverage in the title insurance required-and possibly other riders as well
The FHA is losing money. In fact almost 10% of the loans are delinquent. So, in an effort to preserve the integrity of the organization, they are tightening guidelines. This means, higher credit scores, higher down payments, higher mortgage insurance premiums, and tighter underwriting guidelines and ratios. SO, if you want to buy a home in the Twin Cities you better hurry. We broker FHA loans in Minnesota and have lenders who are flexible. Once the changes go into affect, we will be having to adjust to the new standards. While I understand that the FHA is trying to protect themselves with tighter guidelines, they may be making things worse. Fewer buyers will mean fewer home sales-which will mean softer prices and possibly more defaults. And so it goes.
Ron Insanna thinks now might the best time to buy real estate. Check out what he has to say in this video. I agree that there are some tremendous opportunities for those who want to become a Minnesota landlord.
Plenty of people make resolutions to lose weight, get a new job or make other things happen in their personal life, but relatively few make solid resolutions about money. Make 2010 the year you’ll live a better life financially. Here are a few resolutions to think about:
Write down the things you really want in life: Have you ever written down the big things you want in life? Granted, all great dreams don’t cost money, but many of them do. Money buys freedom – to travel, to retire early, to start a business, to change careers. Putting goals in writing gives them a formality and a starting point for the planning you must do.
Evaluate your risk tolerance: One of the most beneficial things financial planners do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. With the recent recession and market turbulence, many individuals would benefit from an analysis of how much risk they want (or need) to take based on what they want to achieve with their money.
Track your spending: If you haven’t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order whether you do it on paper or on your computer. Mint.com or QuickenOnline.com are free online programs that help you do this.
Get tax and planning advice toward retirement, other goals: Maybe you’ve always winged it with your taxes and considered your company 401(k) the ticket to your financial future. Chances are your planning is inadequate. Start getting references on good tax professionals and consider sitting down with a professional to discuss your whole financial picture.
Cut your debt: If you can’t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum -- on time, every month. And if you can pay extra toward mortgage, auto, student or other borrowings, do so.
Start saving -- or save more: If you haven’t signed up for your employer’s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5-10 percent of your take-home pay based on your cash flow, and place the maximum amount in your retirement plans and savings.
Invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually use makes sense for your health as well as your insurance costs, do it. Keep in mind that bettering yourself is always a good investment.
Redefine the way you shop: If you’re an impulse shopper, break the habit in 2010. As a suggestion, get a legal pad and make that your centralized shopping list – use a single page for groceries, stock-up goods (it’s wise to start buying essentials in bulk if you can measure the savings), essential clothing or big expenditures you’ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don’t stray from the list.
Change the way you commute: If driving is the single best option to getting to work or other destinations, it’s tough to make that switch. But if you have the option to leave the car in the garage at least one day a week and walk, bike, carpool or take public transportation instead, try it. You’ll save money on gas, maintenance, insurance and parking costs, you’ll benefit the environment and in the case of walking or biking, the exercise may do you good.
Cut unnecessary expenses: Do you really need deluxe cable? How much are you paying for your Internet service? Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut – or at least trimmed. Take a hard look at all your “essentials” to see how essential they really are. Aim for a target of at least 10 percent and start setting that money aside on a regular basis.
For many, 2009 was a year of "change". The question is, was it positive or negative. To a large extent, the answer lies within. In the MinnepolisStar Tribune today, they highlighted 3 people who had had a career change. Each of the individuals is doing something completely different than they were a year ago. Each is trying to master their destiny. Change is a constant, how we embrace it is the key. I have 3 friends going through a divorce. Two are moving forward positively, whereas one is being consumed by it. Again, life changes-each had been married 18 years or more. One was 29 years. Anyway, nothing is guaranteed, nothing is without change. My industries-the financial sector-has gone through tremdous upheaval in the last 24 months. Yet, we are reacting to the market and becoming better.
There was a quote once attributed to football coach Lou Holtz that most of us have probably heard. "Life is 10 percent what happens to you," it goes, "and 90 percent how you react to it."
The point is that some things that affect our lives, we have no control over. What we CAN control is how we deal with it. It's something to keep in mind now that it's 2010.
Instead of wondering what 2010 has in store for us, maybe we should instead ask, "What do I have in store for 2010?"
We often get caught up in what "happens" to us rather than realizing that our response to it -- which we CAN control -- is instead what is going to shape us. For example, how many millionaires have gone through bankruptcy, lost a fortune, then rebuilt it? Donald Trump, for one, comes to mind.
Bankruptcy "happened" to the Donald. But he reacted to it by building a fortune and becoming even more successful today. Every adverse thing that "happens" to us is an opportunity; an opportunity to learn and self-correct, but also an opportunity to practice the valuable life skill of affecting the ultimate outcome with our response.
For example, how many new small businesses will be born out of the high unemployment of the recent U.S. recession? You can bet that some of the 10 percent or so of Americans who had unemployment "happen" to them have used the situation to go to work for themselves. The entrepreneurial types who become successful after such an event will have made something happen -- affecting the ultimate outcome with their reaction -- instead of just letting it happen to them.
Don't fool yourself into thinking that producing a positive reaction to a negative event is easy. It takes practice. It takes a knowledge of oneself to understand how to quash the self-pity, self-doubt and knee-jerk angry reactions that can come with a negative event. Some of this is human nature. In fact, there is a human mechanism termed by psychologists as "fight or flight."
When confronted, there are two basic responses we have. Fight and flight. We either face our adversary and defend ourselves, or we run. The question is, which do we do and when? Answering that for yourself will help you react positively to negative events. Are you going to fight or are you going to run?
The answer will let you know if 2010 is going to happen to you, or if YOU are going to happen to 2010. Search for your new Minneapolis home or Minnesota real estate at my site. Your new MN home loan can be found at our mortgage website.
Learn about the Twin Cities real estate, minnesota real estate, minnesota home financing, minnesota mortgages, FHA, VA, Reverse Mortgages, Debt Consolidation, refinancing, first time buyer programs, interest only loans, Edina, Minneapolis and St Paul. Visit our mortgage site at http://www.ventureloanapp.com or http://www.edinamortgage.com
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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