REAL ESTATE
Lending Sources
As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology, and several previous Real Estate blogs, the purchase of a home may be one of the biggest decisions, and investments, one makes in their lifetime. Over the last few years, it has never been more difficult for young buyers, with rising inflation, property prices, and property taxes/insurance. Commercial real estate has seen its own crisis as well, highly affecting small businesses with office vacancy and plunging values. The situation appears to be only getting worse, with an increasing number of defaults and loans coming due.
Last month, we discussed that the “American Dream” is currently on life support, and delaying the purchase of a home, or business property, unless an exceptional “deal” is obtained, may not be the worst decision one can make. Rushing into a “bad” deal may result in loss of capital, credit rating, future borrowing ability, and the property itself.
This month we will discuss one of the key factors involved in the process of purchasing property – Lenders. Not all lenders are created equal, and the one chosen to finance a real estate purchase can make a significant difference regarding loan acceptance, affordability, equity, and interest rates/points. Is it better to finance through a bank or a credit union? Is it more beneficial to use a mortgage broker or direct lender? Is it safe to borrow from a private lender? Let’s discuss some differences…
DIRECT LENDERS:
Banks – Banks are generally the most common financial institutions used for home mortgages. They provide capital for the borrower, at an interest rate normally dictated by the Federal prime rate. These institutions originate the loan using their own funds, but often then sell in bundles to investors and/or secondary lenders.
Credit Unions – Most credit unions are local and easily accessible to the borrower, which can be comforting, as the location can be visited in person. They provide a similar service as banks, however often offer lower interest rates and fees, have softer lending requirements, and provide more personal service. Credit Unions also sell mortgages, but often to each other, and prefer to personalize their relationship with the borrower.
These institutions offer a variety of programs to assist all types of buyers, especially “first-time” buyers. One such entity, the Federal Housing Administration (FHA), secures mortgage loans backed by the government. They have some strict rules regarding the condition of a property, but are worth considering for a loan, as they accept lower credit ratings and down payments as low as 3.5%. There are some misconceptions regarding FHA loans, including that they;
· Only service individuals with low credit
· Are only available to true first-time buyers
· Charge higher interest rates on loans
· Have income limits
· Only loan for single-family homes
None of these are necessarily true, so make sure to perform thorough due diligence when selecting a potential lender.
MORTGAGE BROKER:
A mortgage broker is a financial expert who assists in finding the best mortgage for a borrower. The process includes contacting several lenders, determining the most suitable type of mortgage, negotiating rates, arranging the loan through providing paperwork, submitting the application, and communication with both sides. This option may be best for those who are inexperienced in the home purchasing process. Their fees are generated as commission from the borrower, lender, and/or both, so be sure to shop different brokers as well.
SECONDARY LENDERS:
Secondary Lenders are those who purchase mortgages from direct lenders. There is also what is known as a “secondary market,” where these loans are placed and available to investors, like insurance companies, hedge funds, and pension funds, usually in bundles of packages containing several loans. These Mortgage-Backed Securities (MBS) are sold to free up more capital for the primary/direct lenders. The downside is the borrower has no control over whether their mortgage is sold, and are then tied to other loans/mortgages. If you are uncomfortable with this concept, ask the lender whether they plan to sell and make your decision from there.
PRIVATE LENDER:
A Private Lender is an individual, or company, that provides capital to a borrower, usually at a higher rate than the average lender. Private lenders are normally significantly looser with their requirements, although they may not choose to take on riskier clients. They should only be used if they are proven to be trustworthy.
Some recent facts and figures regarding real estate market trends include the following:
· First-time buyers decreased to a historic low of only 24% of all buyers
· Over 25% have paid all cash, an all-time high
· 18% is the median down payment, the highest in 20 years
· 17% of purchases are for multigenerational properties, another all-time high
These categories continue to be on the rise as an exodus from some higher cost states into lower cost states, and increasing defaults, have turned into cash purchases by wealthier home seekers and large investors. The higher costs created by inflation, rising property taxes, and insurance, have also attributed to less affordability for young/first-time buyers, and the need for families to live together longer.
Don’t be in a rush to purchase without the proper loan, down payment, emergency funds, and secure employment. As always, carefully plan out the potential purchase of a home, and avoid letting the American Dream turn into the American Nightmare!
Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.
