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A Real Estate Column
By Gary Case

Published in the Idaho Press Tribune May 27, 2011

We constantly hear about how depressed the residential real estate market is and how difficult it is for people to get financing or even purchase a home in today's market. While I do not dispute this, here is a narrative of how you might approach purchasing (or selling) if you are considering a move in today's market.

Many people have lost their home due to foreclosure or short sale. The damage to one's credit report makes it nearly impossible to purchase another residence using traditional financing methods. However, there are properties for sale that can be financed by the current owners. Since the current owner becomes the bank, a prospective purchaser should be willing to accept terms of sale that could differ from traditional lenders.; for example, a larger down payment, a higher initial sales price, and/or an above market interest rate might be required to satisfy the seller's need to be compensated for the risk assumed in the transaction.

A purchaser in this situation should also be willing to provide credit reports (on both spouses), personal references, and other information required as by a seller. Typically, the owner-carry loan contains a balloon payment 3-5 years in the future, when it is expected that the purchaser's credit will have recovered to the point that traditional financing is obtainable. Both seller and purchaser should question whether the deal should proceed if the purchaser's total monthly expenses (including the new house payment exceeds 50% of the purchaser's gross income). Ideally, the monthly expense to income ratio should be around 35%.

 


 

 

For buyers obtaining traditional financing, be aware that interest rates are at historic lows and are almost certain to rise over the next few years.
Adjustable rate loan advertisements seem to be everywhere, with the initial rate quoted being much lower than traditional 15- or 30-year fixed rate loans. One tactic I hear touted is that most families move every five to seven years, so purchasing a loan that adjusts after five years is still a great idea. My question, what if you don't move and your mortgage payment rises due to your interest rate rising substantially after the initial guarantee period?!?

Finally, loan underwriting and appraisal guidelines are complex and opaque. Most lenders and realtors struggle to understand current guidelines--and those guidelines help make it difficult for folks to qualify for traditional financing. Further, if the property you are attempting to purchase has unique qualities (i.e., extra land, outbuildings, etc.), finding comparable sales could be a challenge. Without comparable sales, you will likely not be able to get financing.

In most cases, you should not pay more than 1% in fees to get a new traditional loan. Consult your financial, tax, and legal advisors as well as your realtor and mortgage originator when considering a real estate purchase.

 


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