Ft. Collins Estate Trends

Ft. Collins Real Estate Trends: Buy and Hold Investing

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:23:25 -0600

Loan Considerations for Buy and Hold Investors

As far as investment loans, little or no money down loans are impossible. However, lenders do permit the use of Home Equity Lines of Credit or second mortgages from other properties owned by the borrower as a source of down payment. Or, self-employed borrowers are using funds from business lines of credit to fund down payments or renovations (please note: there are asset seasoning guidelines for doing so and the debt incurred by accessing other credit lines must be accounted for against the borrower’s debt-to-income ratio). Thus, we have clients leveraging themselves with other homes they own in order to get in with little or nothing down.
There are exceptions, but practically every lender requires Full Income Documentation on any investment purchase. Full Documentation requires the proof of income through W2s, pay stubs and/or tax returns, as well as proving liquid assets with bank statements. The max LTV is 85% on a non-owner single family property (75% for a 3 - 4 unit); however, most homes are being affected with the ‘declining market’ tag. As such, the maximum loan permitted would be 80% of the purchase price. This is due to mortgage insurance companies refusing to provide MI on investment properties in declining markets. Also, if an investor does not have landlord experience in the past two years, new rules will now not allow any rental income to be included as monthly income. Hence, the buyer would need to qualify with the entire payment going against his/her debt-to-income ratio.
Another point to keep in mind is that Fannie Mae and Freddie Mac are only permitting a maximum of 4 financed properties on a borrower’s credit report. Hence, if a borrower is looking to purchase or refinance a fifth home and already have four loans on their credit, they will face a tremendous challenge in securing financing. This latter rule only affects someone purchasing or refinancing an investment property/second home and NOT an owner occupied purchase.
All this being said, if an investor can put down 20% (or borrow a good chunk of that 20% from other homes they own or lines of credit), is Full Doc, with a 680+ credit score and DTI below 50%, rates are in the upper 6% range on 30yr fixed mortgages with no prepay penalties. With home prices bottoming up in most neighborhoods, coupled with a bullish rental market with increasing rents and low vacancy, investors can easily generate hundreds of dollars of cash flow per month. In fact, many investors choose 15 year fixed mortgages to pay off the loan quickly, yet still cash flow tremendously.

Ft. Collins RE Trends: Short Term Investment Loans

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:22:18 -0600

Loan Considerations for Fix & Flip / Short-Term Investors

Securing conventional financing on a fix & flip or short-term loan is not recommended. Most conventional lenders sell off their mortgages to investors on the secondary market. If the loan is paid off early (before six payments are made), the investor has not recovered their initial investment. The investor will attempt to recover their loss from the lender, who will ultimately come after the loan originator. The loan originator would then be obligated to pay back any premium paid out by the lender. If such activity becomes habitual with the loan officer, the lender can cease doing business with them and their firm.

Furthermore, conventional loans require conventional appraisals. The lender will require that the home is a) habitable in its present state b) in at least ‘average’ condition and c) not in need of any repairs greater than 2% of the purchase price. All three points can be challenging to overcome for investments properties, especially bank owned homes. Consequently, many investors use private money, hard money, home equity lines of credit, cash or specialty investment lenders to avoid failing a conventional appraisal. All of the aforementioned sources of funds can be worthwhile to pursue, but they are meant for short-term loans. Hence, the borrower needs to have a clear exit strategy(ies) to avoid costly extension fees and holding costs. Such loans carry higher interest rates and up-front fees due to their considerable risk. They can be a great route to pursue; however, the investor better be prepared in case the home is not able to sell.

Fix & flip investors should also be cognizant of title seasoning issues. FHA guidelines require that a seller be on title for 90 days before a buyer can purchase the home with an FHA loan. Most flips take longer than 90 days to renovate, market and actually close. But, some deals need limited work and can be turned around quickly. Ultimately, you will want to verify that the new buyer’s lender understands the title guidelines of the lender being used. Furthermore, a flip investor is going to list the remodeled home for significantly higher than what they had paid for it. The lender providing financing to the buyer purchasing the renovated home will scrutinize the new appraisal to ensure the value is justified. Lenders got burned in the past on property flipping schemes and are wary of substantial value increases in short periods of time.

Ft. Collins RE Trends: Jumbo Loans

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:21:16 -0600

Loan Considerations for Jumbo Mortgages

For the Greater Metro Denver area, any loan amount greater than $417,000 is considered a jumbo loan. Fannie Mae and Freddie Mac assign different thresholds for various regions across the country. For instance, $417,000 is not considered a jumbo loan in a high cost city like San Francisco, yet there will still be higher rates for going above $417K.

Due to the size of jumbo loans, they are considered greater risk for lenders, resulting in higher rates. Rates have fluctuated greatly over the past few years on jumbos. As of today, a 30 year fixed could range from 7% - 8%; a full point higher than the prime rate below a loan amount of $417,000. Five year ARMs are popular on jumbo loans, as they typically price out a half point lower than fixed products.

Frequently, a borrower will need to put more money down on a jumbo loan to mitigate the risk. Investors that purchase mortgages are still skeptical of the lending industry, especially higher risk loans, which is why we haven’t been witnessing attractive jumbo rates of late.

To limit the impact on the monthly payment and secure a better rate, many borrowers will take out a first mortgage of $417,000 and then try to find a second mortgage to cover the balance. For example, assume a buyer is purchasing a home for $600,000 and they are able to put 20% down. Instead of taking out one loan at 80% = $480,000, it will likely make sense to split the loan into a $417,000 first mortgage and $63,000 second mortgage. Since the combined loan-to-value is 80%, finding a second mortgage lender should be relatively simple. While the rate on the second will be higher than the first, the blended rate will be significantly lower than the jumbo loan option, resulting in a few hundred dollar savings per month.

Ft. Collins RE Trends: Medium Loans

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:20:31 -0600

Loan Considerations for Loan Amounts Between $200K - $417K

With all the doom and gloom publications that are mostly exaggerated, many potential borrowers believe that home mortgage lending options have dried up. While underwriters and investors are scrutinizing files more closely, attractive rates and terms still exist for owner occupied purchasers seeking a conforming loan limit (under $417,000). FHA and VA can still lend up to 100% LTV and conventional permits up to 97% LTV. There are certain guidelines to meet when going to these high LTVs, but they are not impossible to surmount.

Every home buyer should first ask themselves what payment they feel comfortable in committing to on a monthly basis. Too many buyers over-extended themselves in recent years on homes they simply could not afford, but qualified for on loose lending guidelines. Just because you can qualify for a certain loan amount does not mean that it’s the best decision for you.

Once the comfortable payment has been established, you can back solve for what loan amount will yield an amount close to that payment and search for homes in that price range. You will need to take the amount of down payment into consideration, as well as whether a 30 year, 20 year or 15 year fixed option is best. While adjustable rate mortgages (ARMs) are blamed for much of the current lending turmoil, a sophisticated borrower can determine if an ARM product makes more sense for their situation.

As of today, 30 year fixed rates are hovering right around 6% with no prepayment penalties. But, it is important to keep in mind that if less than a 20% down payment is made on a home, there will be mortgage insurance. Mortgage insurance protects lenders in case of default. Loans above 80% LTV are considered greater risk, thus, carry mortgage insurance. Borrowers can pay mortgage insurance separately per month or it can be built into the rate. Mortgage insurance premiums will vary based on the LTV. In recent years, second mortgages were popular to avoid mortgage insurance. However, they are tougher to secure in this environment in light of the volume of second mortgage lenders that lost millions of dollars in defaulted loans. Since they were in second lien position, their priority in being repaid was subordinate to first lien holders. When homes were foreclosed upon, the second lien holders were typically paid back nothing.

Ft. Collins RE Trends: FHA Loans

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:19:40 -0600

FHA First-Time Buyer Tax Credit

In an effort to boost the sagging real estate market and overall economy, first-time home buyers are being offered a limited time tax credit when purchasing a primary residence.
The highlights of the tax credit are:
•    The tax credit is available for first-time home buyers only.
•    The maximum credit amount is $7,500.
•    The credit is available for homes purchased on or after April 9, 2008 and before
July 1, 2009.
•    Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
•    The tax credit works like an interest-free loan and must be repaid over a 15-year period.

Due to the volume of questions that can be generated with the above, I would recommend clicking on the below link for answers to frequently asked questions: http://www.federalhousingtaxcredit.com/faq.php

Ft. Collins RE Trends: First Time Buyers

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:18:28 -0600

Loan considerations for a first time buyer

Lending guidelines are changing on a daily basis for every type of loan: conventional, FHA, VA & commercial. Nevertheless, there are still very attractive first-time home buyer options available. If you are or will be a first-time buyer, it is critical to speak with a loan officer before looking at homes. It is a crushing feeling to view a home, picture making it your own and then find out that you cannot qualify to purchase it. A loan officer will pull credit, analyze debt-to-income ratios, review assets and income and determine what you can afford.

Presuming a pre-qualification occurs, the loan officer will then be able to provide an array of loan options. Presently, FHA loans are the predominant loan for first-time home buyers as they offer flexibility with down payment, income and assets. In 2009, FHA loans will require a 3.5% down payment; however, such funds can be a gift from friend or family member. Additionally, pending on where the home is purchased, many cities still offer down payment monies to assist borrowers with little or nothing down. There is even a program that permits someone to purchase a home for as little as $100. Please keep in mind that when a borrower does not make a down payment, their interest rate will likely be higher, since it the loan will have greater perceived risk.

Conventional loans are very comparable to FHA loans in loan terms and fees. They can be more restrictive with down payment options, debt ratios and alternative forms of credit. But, they require less paperwork than FHA loans, which typically means a smoother underwriting process. Furthermore, they do not require an up-front mortgage insurance premium like FHA loans ---- although, their monthly premiums are higher than FHA. FHA, conventional and VA loans are in the low 6% range on 30 year fixed mortgages with no prepayment penalties. These rates, coupled with lower prices make it an opportune time to purchase real estate.

Overall, there are pros and cons to each option. As a first-time buyer start thinking through such factors as: what payment you would be comfortable in making, how much money you can put down, establishing a contingency plan for a job loss, how much you would like saved for unexpected expenses and if you were relocated or forced to sell how would handle the situation?

Ft. Collins Real Estate Trends: FICO Scores/Interest Rates (Part 3)

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:17:41 -0600

How can you improve your FICO score?
To improve one’s credit score, it’s critical to understand the factors influencing a credit score. The factors that contribute to a FICO score and the weighted percentages for each are as follows:
•    35% — timeliness of payments
•    30% — the ratio of used debt to allowable debt for consumer credit
•    15% — length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
•    10% — types of credit used
•    10% — recent credit inquiries and recent new credit
The greatest driver behind a score is making timely payments on all accounts. Scores will be adversely affected for any payment that is 30 days late or more. Being late on a mortgage payment will not only crush one’s score, but will also make qualifying for a new home loan extremely challenging. Collections and past due accounts are obviously bad; however, paying off old collections can actually hurt FICOs in the short term. Many collections report from years past. If that collection is paid off, the account activity date is brought current, which could initially drive down the score.
A common misconception is that having one’s credit pulled is the worst thing you can do to your scores. While it’s wise to keep credit pulls to a minimum, keeping the proportion of monthly debt to allowable debt at low ratios is far more critical in improving one’s score. For example, if a borrower has a credit card with a maximum limit of $15,000 and they owe $14,000, the proportion is almost 100% and the borrower is close to being maxed out. Getting the ratio below 50% would help and below 35% would be optimal. For revolving debt, I recommend borrowers contacting their credit card companies every six months to request increased maximum limits. It is vital not to use this new allowable debt, rather, use it as a means to always keep the proportions in check. Additionally, many borrowers will spread out their credit debt over a few cards to keep the ratios below 35% on all of the cards. Or, if liquid funds are available, it could make sense to pay down the debt.
Another method of improving FICOs is to establish credit history over prolonged periods of time. By doing so, the scoring formula treats longer credit history as a means of proving that a borrower can be extended credit, but do not put themselves into a compromising situation. Many borrowers will keep inactive credit cards open, instead of closing them, in order to increase credit history. Most lenders like to see at least four lines of credit on a report (called tradelines) that are open with at least two years of history. Of these tradelines, it’s ideal to have balance between the types of accounts: mortgages, installment loans, revolving debt. Too much revolving debt, such as credit cards, can adversely impact scores as it can make the borrower to appear to be over-extending themselves.

Ft. Collins Real Estate Trends: FICO Scores/Interest Rates (Part 2)

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:17:00 -0600

How does your FICO score impact your interest rate on your loan?

Low credit scores are deemed greater risk for lenders since the likelihood for defaulting on the loan increases. As such, lower FICO scores translate into higher interest rates. Mortgage lenders will group credit scores in a range, usually in 20 or 40 point increments, with interest rates progressively getting better for each higher interval. For example, a borrower with a middle credit score between 660 – 680 will have a higher interest rate (presuming all other variables being equal) compared to one with a 680 – 700 score. Typically, when a borrower has a 750+ credit, they will be able to secure the best possible rate, assuming their income, assets, collateral and down payment are acceptable.

For qualifying, underwriters use the middle credit score pulled from the three bureaus versus an average of the three. For instance, a borrower with scores of 702, 717 and 749 would have a 717 FICO compared to an average score of 722. If there is more than one borrower on the loan, the lender will use the lowest middle score of all borrowers versus the middle score of the primary wage earner, like many lenders used to do. Often times, a husband and wife will have drastically different scores. When that occurs, it is best to qualify off of only the person with the good credit. However, if a spouse or partner is left off of the loan (they can still go on title though), none of their income or assets can be used to help qualify. Therefore, the sole qualifying person must have ample liquid assets, as well as gross monthly income to stay below the lender’s allowable debt-to-income ratio.

Ft. Collins Real Estate Trends: FICO Scores/Interest Rates (Part 1)

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:16:04 -0600

What is a FICO score?
FICO stands for Fair Isaac Corporation, a company that created the most used credit scoring model in the United States. An individual’s credit score is calculated through a statistical algorithm and is used as a factor in determining the likelihood of a borrower defaulting on a loan. FICO scores are generally used for obtaining mortgages, car loans or consumer credit. The scores are provided from the three major credit reporting agencies: Equifax, Experian and Transunion. Typically, there is a variance amongst the scores since each agency has a slightly different scoring formula. FICO scores range from 300 – 850, with higher scores being considered less risky. For mortgage lending purposes, any score over a 680 is considered good and above a 750 is considered excellent. Any score below 580 is considered great risk and will be challenging for such a borrower to secure financing.
The factors that contribute to a FICO score and the weighted percentages for each are as follows:
•    35% — timeliness of payments (adverse dings to scores for any payment greater than 30 days later, collections, past due accounts)
•    30% — the ratio of used debt to allowable debt for consumer credit (an individual that maxes out their credit cards will see a decrease in their score)
•    15% — length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
•    10% — types of credit used (installment, revolving, mortgage)
•    10% — recent credit inquiries and recent new credit (taking out a fair amount of new credit with multiple credit inquires can adversely impact a score)

Ft. Collins RE Trends: Market Analysis Update

Marilou Smith (Your Castle Real Estate) — Thu, 18 Dec 2008 12:14:57 -0600

TOPIC: Improving conditions in Denver’s market

There are some signs of strengthening in our Denver market. The metro area's inventory of available resale housing decreased 20% to 23,120 units in October from October 2007. Some of this reduced inventory is attributed to homeowners taking their properties off the market in frustration because their property is not selling, but lower inventory implies a strengthening market. Remember, the Denver area had housing inventory of 31,989 units in July 2006. Home sales rose 14% to 4,265 in September compared to the same month last year. This is due almost entirely to the lower-end of the market (under $180K) selling like hotcakes. October's median selling price for single-family homes decreased 12% to $206,000 from the same month of '07, and was down 4.7% from September's median of $216,150. Median selling price for single-family homes dropped 10.5% to $222,000 through October, from $248,000 through October '07.Prices are still falling, but at a slowing pace. This trend should continue into 2009 when it is expected to bottom out and slowly climb back. Hang on, it's gonna continue to be a wild ride!

The good and bad with basement kitchens

Marilou Smith (Your Castle Real Estate) — Mon, 10 Nov 2008 08:12:51 -0600

You walk into a property you're looking to buy and rent and you walk down into the basement and voila! you find a full second kitchen. Great! You start calculating how much rent you could get if you could rent the downstairs separate from the upstairs and the cashflow is out of this world! But wait, there are a number of very real problems with this scenario. First of all, it's illegal unless the property is zoned for more than one tenant and the property has been converted to non-residential use. But there are even more practical reasons why having two separate tenants is often not a great idea. The first is the utilities. Since it's a house there will only be one bill for Excel and water. Who's going to pay it? Can you really get the tenants to pro-rate their share if you pay it? Good luck. Or do you just pay it, figuring the extra rent will more than offset paying the utilities? Maybe, but what you'll find is that when a tenant is not paying the utilities they have the heat at 90 degrees all winter and every time you go to the house the kitchen sink is running. Your great cashflow gets eaten up by outrageous utility bills and you're back where you started. For these reasons and many more I suggest you don't try to put two tenants into a property made for one. But that doesn't mean the second kitchen has no value. It might be useful for an extended family who needs the extra space kitchen and might actually command a larger rent. Check with your local building department and your insurance agent though, to make sure it's acceptable to have a basement kitchen in the first place.

Don't be that guy

Marilou Smith (Your Castle Real Estate) — Mon, 10 Nov 2008 08:10:38 -0600

A LOT of agents don't advise their clients to get sewer scopes when they purchase a property. This is a major mistake. A broken sewer can cost between $3,000 - $10,000 dollars to repair and it only costs $99 ($99Rooter - others are more expensive) to have a tech put a camera down the sewer pipe and videotape the sewer all the way to the mainline. This will tell you and the-buyer what the condition of the sewer is. So let's see, we pay to have the furnace inspected but a new furnace will only be about $2,000. We pay to have the roof inspected but that's probably a $4,000 job. So why don't we always inspect the sewer? One reason is because, let's face it, Realtors want closings. Many figure if they keep their mouth shut and don't go out of their way to recommend a sewer scope that's one less chance the deal will fall through. Inexcusable, but all too commonplace. Don't be a chump - get a sewer scope.

Investors, know thy roof

Marilou Smith (Your Castle Real Estate) — Mon, 10 Nov 2008 08:08:37 -0600

Have you ever driven through Aurora North looking for a rental property and taken a close look at the roofs? Here's what you'll see: a bunch of 1950's ranches in varying states of repair or disrepair, lawns that are often grassless, old handcrank windows and roofs in almost perfect condition! This surprised me at first and perplexed me for a long time. Why, in a neighborhood devastated by foreclosures with properties with massive deferred maintenance are the roofs in such condition? Really! Stand in the middle of a typical street and looking at 10 roofs simultaneously, you'll be amazed. Well, it turns out the answer is pretty simple. There was a huge hailstorm in the mid-90's and most of the roofs were replaced by insurance companies then. The result is that while you certainly need to be careful about what you buy in Aurora North, chances are your roof is going to be fine. Thank goodness for small favors.

Don't guestimate, estimate that rent

Marilou Smith (Your Castle Real Estate) — Mon, 10 Nov 2008 08:06:36 -0600

A lot of clients ask me how to figure out what market rents are in a neighborhood. This is a critical input into the calculations an investor needs to make in order to determine what their return on investment will be on a rental property. So you don't want to screw this up! Unfortunately, this is one of the many figures new investors get wrong.

One place people go to get rents is Rent-o-Meter. Rent-o-Meter is billed as an online resource to get accurate market rents. In my experience it is anything but! However, I have a fairly simple solution. Multiply what you see on Rent-o-Meter by 80% and you'll probably be close. I can't explain why but I find rents on Rent-o-Meter to be about 25% high, so multiplying their rents by 80% will get you close (do the math, it works out).

So then, how do you get market rents? Simple: start at the subject property and drive concentric circles around the neighborhood. Call every For Rent sign you see (if you don't see any this is a good sign!). Interview the landlords. A subtle but telling sign is how polite the landlords are on the phone. If they act overly solicitous and desperate it's a sign that vacancies are high and they're desperate to get tenants - not a good sign for you. If they are breezy, abrupt, and even rude, that's GREAT! It means they have too many phone calls for their vacancy and it's a strong landlord market. This is what you want to hear!

In many neighborhoods around town today this is exactly what you'll find. I know. When the vacancy rate was 13% a few years ago I was very nice over the phone. Now that it's 4%...well, a little less nice. Nothing like good -ol' market research.

You may have a special consideration with that loan

Marilou Smith (Your Castle Real Estate) — Mon, 10 Nov 2008 08:04:34 -0600

The talk around the water cooler these days is all about LOANS. Who can get them? At what price? What if I already have a few loans, do I still qualify? A year or two ago the question was at what price do I get a loan (those were the days!). Today it is "am I still in the game?"

Here's the deal: if you have an owner occupied loan and 3 investor loans you cannot buy any more properties and get Fannie Mae / Freddie Mac financing, meaning you can't get a conventional 30-year fixed loan. Now, my hope is that someone reads this and tells me I'm wrong. That would be great! But as far as I know that is the case.

Where does this leave you? You can pursue loans that are warehoused by lenders, meaning they are not sold on the backend to Fannie or Freddie. You are probably looking at a minimum of 20% down but more importantly it will be almost impossible to get a 30-year loan. But a 5/1 ARM is not out of the question. (Lenders, please start a dialogue here and let folks know who has what products available.) There is also Hard Money available. I met with a group of high-end Hard Money lenders today to discuss options and the consensus is that they are proceeding...but with extreme caution.

A final version is to contact smaller local lenders. You'll need 25% down, but if your story makes sense, you'll get your loan - and usually at an attractive rate. Let me know what your situation is and I'll try to refer you to the right person.