Real Estate Financing for Retirees

Real estate financing, for the most part, is no different from state to state. However, if it has been a few years since you last went through the process of getting a mortgage, you could use some refreshing on the world of real estate finance before placing an offer and purchasing a new home in a retirement community.

Types of Lenders
While shopping for financing during your home buying process, you may encounter several types of mortgage lenders. Here is an explanation of some of the more common types of lenders you may encounter along the way to homeownership.

Mortgage Brokers
Mortgage brokers are essentially middlemen in the mortgage process. They serve as intermediaries between lenders and borrowers. Mortgage brokers typically have the widest array of loan programs available, because they have relationships with several lenders. The term “middleman” is usually associated with extra expense, but mortgage brokers can actually save you money by helping you comparison shop and find the best mortgage for your particular situation. Mortgage brokers will assist you with things such as filling out and submitting your loan application, running your credit report, scheduling an appraisal, and helping to coordinate your closing.

However, the mortgage broker does not make the decision to fund your loan. A person called an underwriter, who is employed by the lender, makes that decision. Mortgage brokers are paid a fee for their services, sometimes charged to the borrower in the form of points or origination fees, but they can also be paid by the lender, or often times a combination of the two. Sometimes this fee can be negotiated in your favor, or you can also ask that the broker just charge a flat fee, a strategy that is recommended by many industry experts.

Mortgage Bankers
Mortgage bankers are in the business of originating loans and then selling them to the secondary mortgage market (more on that in a moment). Mortgage bankers often have appealing loan rates and programs, but oftentimes do not have access to as many sources as the previously mentioned mortgage broker.

Banks and Credit Unions
Most banks and credit unions also offer mortgages. Funds for these loans are obtained from their customers through checking and saving accounts as well as certificates of deposit. The bank or credit union will sometimes service the loan themselves (if it’s a large bank) or sell the loan to the secondary market.

The Builder’s Lender
If you are buying or building a new home, your builder may also own
a mortgage company or could possibly be affiliated with one. They will
usually try to get your business by dangling low initial interest rates or
credits toward closing costs in front of you. Whether or not going with
the builder’s lender will pay off for you in the long run is not a simple
question to answer. But here’s my advice for what you can do to try and
figure it out.

First, get a good faith estimate from the builder’s lender. I’ll discuss good faith estimates in depth a little later, but for now, just know that it is an estimate of how much money you will have to pay out of pocket at closing, what your closing costs will be, and what your monthly payments will be. With this in hand, take it to a mortgage broker not affiliated with the builder or builder’s lender and have them explain to you the good and bad points of the builder’s financing options. There is no sense in trying to dissect it on your own. There are so many places that lenders can hide fees it’d make your head spin.

A good mortgage broker won’t mind taking the time to explain the pros and cons to you, because they ultimately hope to gain your trust and subsequently your business. However, if the deal you are quoted by the builder’s lender is a good one, an ethical mortgage broker will tell you so. If he can’t meet or beat the builder’s financing, you might want to go with the builder’s lender.

Secondary Mortgage Market
It is common for lenders that provide home loans to sell these loans to the secondary market, made-up of investors such as Fannie Mae and Freddie Mac. Selling your loan provides lenders with the funds they need to issue new mortgages. If your loan is sold, it will not affect the terms of your mortgage or your payment. It will however affect who your payments are made payable to, so if you are using an online bill payment method make sure you are paying the correct entity and sending your payments to the correct address.

Types of Mortgages
Just as there are many sources for your new mortgage, there are also several different types of mortgages. Here are some of the most common types of mortgages.

Fixed Rate Mortgage
The most common type of mortgage, a fixed rate mortgage, is one in which your interest and principal payments remain the same (constant) over the life of the loan. Bear in mind that your total payment may fluctuate (usually upwards) as real estate taxes and homeowner’s insurance rates change over the life of your loan. Different terms are available for fixed rate loans, from as short as 10 years to new 40 and even 50 year mortgages, loan periods which were recently introduced. Keep in mind that the shorter the term, the higher your monthly payment will be. However, the longer the term of the mortgage, the more interest you will end up paying over the life of the loan.

Adjustable Rate Mortgage (ARM)
Adjustable-rate mortgages are mortgages in which the interest rate on the mortgage fluctuates over the life of the loan. The rate will initially be fixed for a specified period of time. For example, with a 5/1 ARM the rate will be fixed for 5 years and adjust every year after that. Rate adjustments are made based on changes to a defined index. The interest rate is determined by adding a fixed number of points to the index. The attraction with adjustable-rate mortgages is that rates are initially lower than that of fixed-rate mortgages. If you do not intend to live in a house for longer than the initial fixed rate period, you will not be subjected to the adjustments in the rate. The disadvantage of an ARM is that during times of rising interest rates, your payments can increase dramatically after the fixed period is over.

Balloon Mortgage
A balloon mortgage is a short term mortgage, usually 2 to 7 years in length, that is amortized over 30 years with the balance becoming due in a lump sum at the end of the term. Again, rates are lower than fixed-rate mortgages, but some people do not want to have to refinance or pay a large lump sum at the end of the loan term.

Reverse Mortgage
Reverse mortgages have been around for many years but are just recently gaining notoriety. A reverse mortgage is a mortgage where the lender pays you either one lump sum or a smaller amount each month, as opposed to you paying them. This can give you extra money to pay your bills and do the things you want to do but otherwise might not be able to afford.

When you pass away or decide to move, your heirs or new owners get ownership of the home and must repay the mortgage. This is most commonly accomplished by selling the home. Reverse mortgages are only available to people over the age of 62, and should only be considered in specific circumstances. In fact, before obtaining a reverse mortgage you must be counseled by an HUD approved reverse mortgage counselor.

VA Loan
Veterans of the United States Armed Services with more than 180 days active duty during peacetime, or 90 days during times of war may be eligible for a VA loan through Uncle Sam. VA loans can be used to purchase a home, manufactured home, or condo. In order to obtain a VA loan, the law requires that:
• the applicant be an eligible veteran who has available entitlement
• the veteran must occupy or intend to occupy the property as a home within a reasonable period of time after closing
• the veteran must have satisfactory credit
• and, the veteran and spouse must show stable income sufficient to meet the mortgage payments.

The advantages of VA loans are that they require no down payment, they are available from most lenders, and the VA prohibits lenders from requiring PMI, or Private Mortgage Insurance. The VA is guaranteeing the loan, so there is no need for a lender to require the veteran to pay for additional insurance against default.

On the downside, VA loans carry a one time funding fee ranging from one and a quarter percent to three percent, depending on the veteran’s service, as well as other factors.

For more information on VA loans, visit http://www.va.gov

Special Financing
There may be times when a conventional real estate loan will not meet your needs. For these cases, special types of real estate financing may be available to you.

B/C Credit Mortgages
B/C loans, sometimes referred to as sub-prime loans, are for those who do not meet the credit guidelines established by Fannie Mae or Freddie Mac. Through B/C loans, borrowers are able to obtain financing for a temporary period of time, when their credit history excludes them from receiving “normal” loans. Recent bankruptcy, divorce, foreclosure, or late payments that show up on your credit report can bump you into this category. You should be aware though that loans of this type carry higher interest rates than those of “A” credit borrowers.

Bridge Loans
Just as Citizen’s Property Insurance is the insurer of last resort, a bridge loan should be your “financing of last resort”. Let’s say you look at a home in Florida or somewhere else, fall in love and have to have it. But, you haven’t yet sold your home in New Jersey (or wherever you’re from). A bridge loan will allow you to purchase the new home without having to first sell your home up North. There are essentially two ways for a bridge loan to be structured.

The first way is you get a bridge loan for enough money to pay off your current home and make your deposit on the new home. Then you would just get a regular mortgage on the new home. You won’t have to make payments on the bridge loan for a predetermined amount of time, say 6 months or a year, but in the meantime, interest is accruing. The rub lies in that if you don’t sell your home in the allotted time, you will have to start making payments on the bridge loan, meaning you’ll now be making two mortgage payments. Once your home up north sells, you pay off the balance of the bridge loan and any interest that has accrued.

The second way to structure a bridge loan is to use the equity in your home up north to make the down payment on the home in Florida. Now you have two loans, your original mortgage, and a second home equity mortgage. Then, you’ll get a mortgage on the new house. So, essentially you have three loans. But, you aren’t usually expected to pay on all three, just your original mortgage and your new mortgage. Again, once your home sells, you’ll pay off your original mortgage and the bridge (second equity mortgage) as well as any interest that has accrued.

Experts only recommend getting a bridge loan if you know that you can afford to make two mortgage payments if you had to. Usually, a lender won’t give you a bridge loan unless you have enough cash to make both payments anyway. Also note that the rates on a bridge loan will be significantly higher than say, a typical 30-year mortgage. It can pay to shop around to different lenders to see what types of bridge loans they may offer and what the rates are.

Interest Rates
News of interest rates is everywhere, your local newspaper, online and on television. Some people in the real estate and finance worlds hang on every eighth-of-a-point fluctuation in interest rates. For most of us, however, there is little need to do this. A quarter-point here or half-point there shouldn’t affect your plans for purchasing a home in Florida, so long as you have planned wisely in the financial department. For average size mortgages these fluctuations won’t add but a paltry sum to your mortgage payment. But it is important to know a few things about interest rates, in hopes of better understanding how they could affect you.

How Interest Rates are Determined
Mortgage interest rates, contrary to what many people believe, do not follow the Federal Reserve Board’s lowering and raising of rates. Instead, they actually anticipate the fed. A closer tracking device for mortgage interest rates is the 10-year Treasury note. If you want to know what mortgage interest rates are doing, follow the 10-year Treasury. But as mentioned before, slight changes in rates are nothing to lose any sleep over.

Rate Locks
The typical escrow (time from contract to closing) on a home is 30-60 days, but interest rates are constantly changing. In order to protect yourself in an environment of rising interest rates, get a rate lock. With a rate lock the lender holds or guarantees the interest rate for you for a predetermined length of time. Sometimes they will do this for free for a minimal amount of days, say 15-20, and for longer periods they will charge you a fee. A 60-day rate lock will be more costly than a 30-day rate lock.

Sometimes during escrow, rates will drop, leaving you paying a higher rate than the market rates at time of closing. To avoid this, ask for a rate lock with a one-time float. If the rate goes lower anytime before closing, you can float down to the lower rate. Again, some lenders offer this feature for free, with others you will have to pay. Shop around because the market is always changing and so are lenders’ terms and policies. Competition among lenders can run high, especially in slow markets.

Interest Rate Buy Downs
An interest rate buy down is a reduction in the interest rate that you pay on a mortgage. There are temporary buy downs and permanent buy downs. Temporary buy downs are common as an incentive for builders; they pay the lender a fee to get the buyer a lower initial rate for a set period of time, usually a year or two. This is also an incentive sometimes offered by home sellers to entice someone to choose their home over another.

As a buyer, you can also acquire a permanent buy down. With a permanent buy down, you pay a fee up front to have your interest rate lowered or “bought down” for the life of the loan. You should only do this if you plan on keeping the mortgage for a long time, as it will take a while for the lower rate to recoup the money you paid out to buy it down. Check with your mortgage lender to see if a buy down might make sense for you.

Applying for a Mortgage
The mortgage application is going to be mostly what you would expect. It will ask for your name, social security number, your address for the past two years, a copy of your driver’s licenses, a list of all your assets as well as debts along with monthly payments, employment information, sources and amount of all your income, and more. The type of lender and type of loan you choose will determine the additional information that the lender will ask you to submit along with your mortgage application. These can either be faxed, e-mailed, mailed, or hand delivered to the lender, depending upon your location and theirs. Just to give you an idea, some of the items they may need include:

• a copy of your sales contract (if you’ve executed one)
• proof of your deposit (copy of the cancelled check, bank statement, etc.)
• pay stubs for the last 30 days if you are still working
• your past two years of tax returns
• statements for all your bank accounts and investment accounts for the past three months
• a copy of your current mortgage statement if you have one
• if you are divorced, they will probably ask for your divorce decree
• if you are self-employed they will need a current profit and loss statement
• if you receive a pension or social security the lender will ask for proof of such

Again, depending on the lender and type of loan you are applying for this list can be longer or shorter.

Good Faith Estimate
Within three days of applying for a loan, you should receive a “good faith estimate” as well as a HUD guide to settlement costs from the bank or mortgage company that you applied to. The good faith estimate is just that, an estimate of the costs that you will be expected to pay at closing. Costs that will be reflected on the good faith estimate will include costs for appraisals, surveys, attorney’s fees, recording and transfer fees, doc stamps, mortgage origination fees, and more. Never fully commit to a lender until you have reviewed and are comfortable with their good faith estimate.

1031 Exchange
Instead of getting a mortgage to pay for your new property in Florida, why not trade for it? You may already be familiar with Internal Revenue Code Section 1031, that allows you to defer any capital gains on the sale of an investment or income property by investing those gains into another “like-kind” property. Most commonly referred to as “1031 Exchanges” or “Like-Kind Exchanges” these complex transactions, when executed properly, can help you purchase your eventual retirement, investment, or second home property in Florida. You should of course consult your tax advisor before considering this type of transaction to see if it supports your financial, investment, and real estate purchasing goals.

Should you get the green light to proceed, your next step should be to contact a Qualified Intermediary. Ask your tax advisor, accountant, or real estate agent for referrals. A Qualified Intermediary is a company that specializes in 1031 Exchanges. Once you contact them, they will guide you as to how to structure any sale or purchase contracts to facilitate the exchange. You will have specific time constraints to adhere to, namely 45 days to identify a property you wish to exchange for, and 180 days to close.

In a perfect world, you would close on the property you are giving up or selling first, then purchase a new property. This is called a delayed exchange, and is the most common, least expensive, and least paperwork intensive type of 1031 exchange. However, as we all know, the world is not always perfect, and sometimes the opportunity to purchase a prime property will pass you by if you do not act in a timely fashion. You may find it necessary to purchase a property before selling your current property. Most people do not know that “reverse exchanges” are available that will allow you to do this and still defer your capital gains. It will be at a higher cost and with much more paperwork involved, but it can be done.

For more information on 1031 Exchanges, contact your tax advisor or accountant. To find a qualified intermediary visit http://www.starker.com.

Your Credit Score
Most everyone has heard of a FICO score, created by Fair Isaac Corporation. In case you haven’t, it’s one score that lenders will look at to determine how good of a credit risk you are, and consequently how much money they will lend you and with what terms. FICO scores range from 300 to 850 and the median score nationwide is 723. If your score is above that median, you are doing pretty well as far as most lenders are concerned and you should qualify for the best rates when shopping for a mortgage.
The big three credit reporting agencies, Equifax, Experian and Transunion also produce individual credit scores based on the information they have about you and your history. The problem, however, with credit scores is that they are generally unpredictable, and can vary widely from different reporting agencies.

The problem that a lot of people face is that they have no clue going in to apply for a mortgage what their credit score is and when they find out it’s too late to do anything to improve it. Experts recommend that at least six months before applying for a loan you should visit www.MyFico.com to get your score. There is a fee involved with this but the knowledge you will be armed with after finding out your score could prove to be invaluable.

Ways to Improve Your Score
There are several ways to beef up your credit score in the months leading up to applying for a loan. Most important, experts agree, is to keep your credit card balances below 25% of what your available credit limit is. Thought you might escape those library fines since you’re leaving town? Not so fast. If they are turned over for collection, they can damage your score, so make sure you are all square with the house. Also, do not open or close any credit accounts, including car loans, in the time leading up to applying for a loan. Both can hurt your score.

Your Credit Report
Your credit score is based upon the information that can be found in your credit report. Everyone is entitled to a free copy of his or her credit report once a year. Simply visit www.annualcreditreport.com to get a copy. Be sure to check your report for any errors, such as erroneous bad debt claims and the like, which can drag down your score.

For more information on credit scores and credit reports visit:
http://www/myfico.com
http://www.annualcreditreport.com

Mortgage Rates, Charts, and Calculators
Visit the Zillow Mortgage Marketplace at http://www.zillow.com/mortgage/Mortgage.htm to find the latest information on mortgage rates and to calculate what your payments might be.