What Is A Sellers Concession?
On every home purchase, no matter what state the home purchase is, there are closing costs associated with the home purchase transaction. Home buyers need to put down a down payment plus they will have closing costs associated with the purchase of the home. All mortgage loan programs allow a home seller to offer a home buyer a sellers concession towards closing costs. The home buyer can then use the sellers concessions to offset their closing costs where in many instances, the can cover all of the home purchase closing costs and all they need to worry about is coming up with the down payment.
What Does Closing Costs On Home Purchase Cover?
Closing costs on a home purchase transaction covers all costs and fees associated with the origination of the mortgage loan and all costs and fees associated with the purchase of the home. Examples of closing costs includes origination fees, credit reporting fees, underwriting fees, title charges and fees, attorneys fees, recording fees, homeowners insurance premium, pre-paids ( 2 months tax and insurance escrows ), appraisal fees, home inspection fees, and any other fees and costs in the purchase of the home.
What Is The Maximum Sellers Concession A Buyer Can Receive?
The maximum sellers concession a home buyer is allowed to accept depends on the mortgage loan program. FHA allows a maximum of 6% sellers concession, VA allows a maximum of 4% sellers concession, Conventional Loan programs allows a maximum of 3% sellers concession on owner occupant and second homes and 2% on investment properties. Home buyers can use all of the sellers concessions for closing costs only. Home buyers cannot use sellers concessions towards the down payment of the home. Any surplus of sellers concessions needs to go back to the home seller and the seller cannot give a home buyer a kickback of the left over sellers concessions in any way or form. It is best for the home buyer and mortgage loan originator to make sure that the sellers concessions is not wasted and that any surplus of the sellers concessions will be used such as by buying down the rate for a better rate. Home buyers can pay points to buy down their rates and on cases of sellers concessions overages, that is how mortgage lenders use the surplus sellers concession is to buy down the rate by buying points.
Why Would Sellers Give Sellers Concessions?
Sellers concessions is very common and most home buyers do get sellers concessions by home sellers. Home sellers are not giving out free money for the sake of helping a home buyer. Sellers concessions normally helps a home buyer qualify to purchase home where otherwise they would not qualify. Most home buyers need to scrap by to get a down payment of 3.5% for FHA Loans or 3% to 5% down payment for Conventional Loans and closing costs can add to another 3% or more of the purchase price. Lets take a case scenario on how home sellers give sellers concessions towards a home buyers closing costs: Say a home seller wants to net $100,000 on a home purchase and wants to help the home buyer with closing costs of $4,000 on a FHA Loan. The home seller and home buyer will negotiate a purchase contract for $104,000 with a $4,000 sellers concession towards the home buyers closing costs. The home buyer will have $4,000 to cover his or her home closing costs and the home seller will net his $100,000 price.
What Is A Short Sale And How Does It Work?
A short sale is when a mortgage lender approves the sale of a homeowner’s home for a value less than the amount the homeowner owes on their mortgage loan balance. After the 2008 Real Estate and Mortgage Meltdown, real estate values have collapsed where many homeowners who had equity in their homes were left with home mortgages that were higher than the amount they owed on their mortgage loans. Since the economic and the real estate meltdown, many homeowners have seen their home values go back up and many, especially in California, Florida, Illinois, Texas, and other parts of the country. However, there are still homeowners who still have mortgage loan balances that is higher than the balance of their homes. In order to sell their homes, they need to come up with the difference on what they owe from the sales price of their home. With a short sale, the homeowner has the mortgage lender’s blessing to sell their home at the current market value and will often forgive the debt that they owe.
Short Sale Process
If a homeowner is going through financial hardship and they owe more on their mortgage loan balance than the value of their homes, their mortgage lender may accept a short sale. Getting approved for a short sale is a process. Mortgage lenders will want to see financials of the homeowner and the reason why their mortgage payments is a hardship. After carefully reviewing the mortgage loan borrower’s financials and credit, the mortgage lender can approve a short sale. The homeowner can choose a realtor of their choice. The mortgage lender will do their own due diligence on pricing the home and will research recently sold properties in the area. Once a listing price is decided, the homeowner can have their real estate agent list the property. Once a potential home buyer submits a real estate purchase offer, the homeowner has no say so whether or not to accept the real estate purchase offer. The real estate purchase offer needs to be submitted to the mortgage lender who holds the note. Most mortgage lenders take their sweet time in reviewing the real estate purchase offer and sometimes it may take weeks or months before getting back to the home buyer with a counter offer. Short sales are a long process and take much longer to close than traditional home sales because banks and mortgage lenders normally take long.
Can A Homeowners Who Short Sales Qualify For Another Home Loan?
A short sale will definitely affect the credit and credit scores of the homeowner. However, homeowners with a prior short sale can definitely qualify for another home loan after short sale. If the homeowner has been timely with their mortgage payments and all other monthly debt payments up to the date of their short sale for the past 12 months, there is no waiting period to qualify for mortgage after short sale. Unfortunately, most mortgage lenders want the homeowner to skip at least one months mortgage payments for the short sale to be effective and this 30 day late payment on their mortgage payments will trigger a three year waiting period after short sale for FHA Loans and a four year waiting period after short sale for Conventional Loans.
Credit After Short Sale
A short sale will most likely trigger a 100 plus point drop in the homeowner’s credit scores. However, the credit scores will eventually go back up as the short sale ages. Homeowners who had short sale should start re-establishing their credit by adding positive credit and being timely with all of their monthly debt payments. Secured credit cards are the best tools in re-establishing credit after short sale and each secured credit card can boost a consumer’s credit scores by 30 or more points and expedite the credit re-establishing process. Never be late on any monthly debt payments after short sale. Most mortgage lenders will disqualify mortgage loan borrowers who had late payments after short sale, bankruptcy, and foreclosure. One 30 day late payment after short sale can disqualify a mortgage loan borrower from qualifying for a mortgage loan for at least seven years. A short sale will be on a consumer’s credit report for 7 years.
Purchasing 2 To 4 Unit Properties
First time home buyers or home buyers who eventually want to become real estate investors can now purchase 2 to 4 unit properties as an owner occupied residence with a FHA Loan with 3.5% down payment. 2 to 4 unit properties can be great investments for home buyers intending on occupying one of the units and renting the other units to offset the monthly housing expenses. FHA does require that mortgage loan borrowers of 2 to 4 unit properties occupy one of the units for at least one year. After occupying one of the units for at least one year, the 2 to 4 unit property owner can then qualify for another owner occupied home and rent out the unit they are exiting.
FHA Loans And 2 To 4 Unit Properties
To qualify for 2 to 4 unit properties with a FHA Loan, the mortgage loan borrower needs at least a 580 FICO credit score. There is a 3.5% down payment requirement for mortgage loan borrowers with at least a 580 FICO credit score. Borrowers with credit scores under 580 FICO credit scores, a 10% down payment is required. Mortgage rates on 2 to 4 unit properties are higher than mortgage rates of single family homes because mortgage lenders view multi unit buildings as higher risk. With higher risk means higher mortgage rates. To get the best mortgage rates on 2 to 4 unit properties, one should have credit scores of at least 640 FICO. Mortgage lenders will require three months of reserves for three and four unit properties. Reserves are one month of principal, interest, taxes, and insurance or PITI. Many mortgage lenders require two years landlord experience from the mortgage loan borrower to be able to count potential rental income as part of their mortgage lender overlay. If a mortgage lender requests two years landlord experience in order for them to count potential rental income, the seek another mortgage lender where they have no mortgage lender overlays .
Using Potential Rental Income To Qualify
FHA allows up to 85% of the potential market rent income to qualify for the mortgage loan borrower’s income calculations. However, many FHA mortgage lenders have mortgage lender overlays where if the mortgage loan borrower does not have two years landlord experience, then the potential rental income cannot be used to qualify. If you are told that you do not qualify due to mortgage lender overlays because you do not have two years landlord experience, contact Gustan Cho Associates at 262-716-8151 or email Gustan Cho at GustanCho@Outlook.com.
Can I Qualify For 2 To 4 Unit Properties With Conventional Loans?
You can qualify for 2 to 4 unit properties with conventional loans, however, owner occupied 2 to 4 unit properties require 15% down payment with conventional loans. You can also use potential rental income but the potential rental income you can use is 75% of the potential market rent that is stated on the home appraisal.
Second Home Financing Requirements
There are rules and regulations with second home financing. First, the home needs to be classified as a second home. For the home to be classified as a second home, there needs to be a distance between the first primary home and the proposed second home location. The distance needs to be at least 60 miles from the primary home of the mortgage loan borrower or the property needs to be located in a different state. For example, if the primary mortgage loan borrower’s first home is in Illinois and the second home purchase is in Florida, there would be no question that the second home purchase is legitimate. However, if the borrower’s first home was in Naperville, Illinois and the second home purchase was in Downers Grove, Illinois, which is less than a 10 mile distance, then the Downers Grove second home purchase will not qualify for second home financing due to the short distance. Second Home Financing needs to make sense otherwise it will not qualify for second home financing and the only loan program the second home buyer will qualify for would be investment home financing.
Second Home Financing Versus Investment Home Financing
Second home financing and investment home financing can only be done with conventional loans or portfolio loans. Other loan programs such as FHA Loans, VA Loans, and USDA Loans are only for owner occupant primary homes only. The reason why second home financing is much more favorable than investment home financing is because with second home loans, a 10% down payment is required and mortgage rates are comparable to owner occupied primary home mortgage rates. Investment home financing require 20% down payment and mortgage rates are typically 0.50% higher than second home financing.
Special Circumstances To Be Classified As Second Home
There are special circumstances where mortgage lenders will waive the distance between the primary home and second home requirements if the deal makes sense. If the primary home is a single family home and the second home buyer wants to purchase a second home that is nearby, which is 60 miles or less than the primary home, they can do so and qualify for second home financing as long as the second home purchase is a waterfront property and/or in a resort area. For example, if the second home buyer has a home in the suburbs of Chicago and it is only 30 to 40 miles away from downtown Chicago and want to purchase a condominium in Chicago so they can enjoy the nightlife on the weekends, that is doable and these home buyers will most definitely qualify for second home financing even though the distance is less than 60 miles. Same scenario with a homeowner who has a primary owner occupant home in Tampa, Florida, however want to purchase a waterfront condominium in Clearwater, Florida which is only 25 miles away from where they live, they will qualify for second home financing. If a homeowner lives in Tampa, Florida and owns a single family home that is 2,000 square feet and wants to purchase another single family home that is 2,000 square feet in Clearwater, Florida, that would not qualify for second home financing. On this case scenario, they would only qualify for an investment home financing and the home buyer will need to put a 20% down payment and get mortgage rates for investment homes and not second home mortgage rates.
Debt To Income Ratio
Debt To Income Ratio is the sum of the minimum month debt payments a loan applicant has divided by the loan applicant’s monthly gross income. Mortgage lenders consider debt to income ratios one of the most important factors when qualifying for a mortgage loan. There are different debt to income ratio requirement depending on the mortgage loan program. For example, the maximum debt to income ratio permitted for FHA Loans is 56.9% if the mortgage loan applicant credit scores of at least 620 FICO or higher. If the mortgage loan borrower has credit scores of under 620 FICO credit scores, then the maximum debt to income ratios allowed is 43% debt to income ratio. For conventional loans, the maximum debt to income ratios allowed is 45% DTI. For jumbo loans, the maximum debt to income ratios allowed is normally 40% DTI.
What Is Front End Debt To Income Ratio?
The front end debt to income ratio is the monthly principal, interest, taxes, and insurance payments divided by the mortgage loan borrower’s gross monthly income. The front end debt to income ratios is also called the housing ratio because mortgage lenders consider the housing ratio or proposed housing ratios very important to see whether or not the mortgage loan borrower can afford the new proposed mortgage payment. FHA Loans has a front end debt to income ratio cap of 46.9% DTI for FHA mortgage loan borrowers with credit scores of 620 FICO or higher. For FHA mortgage loan borrowers with credit scores of under 620 FICO credit scores, the front end debt to income ratios gets reduced to 31% DTI.
What Is The Back End Debt To Income Ratio?
The back end debt to income ratio is the front end debt to income ratio plus all other minimum monthly debt obligations such as minimum credit card payments, auto loan payments, student loans, installment loans, and any other monthly debts such as child support payments, alimony payments, payment agreements divided by the mortgage loan borrower’s gross monthly income.
Solution To High Debt To Income Ratio Borrowers
Mortgage loan borrowers with high debt to income ratios often need to go with FHA Loans. FHA Loans are much more lenient with high debt to income ratios than conventional loans. Maximum debt to income ratios for conventional loan programs is capped at 45% where FHA Loans have debt to income ratio caps at 56.9%. FHA Loans also allow for non-occupant co-borrowers for FHA mortgage loan borrowers with high debt to income ratios. More than one non-occupant co-borrowers are permitted with FHA Loans. With conventional loans, Fannie Mae does not allow non-occupant co-borrowers, however, Freddie Mac does allow non-occupant co-borrowers. Again, both Fannie Mae and Freddie Mac have debt to income ratio caps of 45% DTI.
What Are FHA Loans?
FHA Loans are the most popular mortgage loan programs in the United States today. The Federal Housing Administration, FHA, is a subsidiary of the United States Department of Housing and Urban Development, HUD. FHA is not a mortgage lender. FHA’s mission and objective is to insure FHA Loans against default from FHA mortgage loan borrowers which are originated by banks and mortgage companies who are FHA approved and where all their mortgage loans meet FHA mortgage lending guidelines. As long as the FHA approved banks and mortgage bankers make sure that all of their FHA mortgage loan borrowers meet minimum FHA mortgage lending guidelines, FHA will insure the FHA approved banks and mortgage lenders in the event if the mortgage loan borrower defaults on their FHA Loans.
Minimum Requirements On FHA Loans
FHA Loan Requirements include the following:
- Minimum 580 FICO credit scores for 3.5% home purchase FHA Loans.
- If credit scores are under 580 FICO, then 10% down payment is required.
- If credit scores are under 620 FICO, then maximum debt to income ratio is capped at 43% debt to income ratio.
- If credit scores are 620 FICO or higher, then the maximum back end debt to income ratios are capped at 56.9% and maximum front end debt to income ratios are capped at 46.9%.
- FHA does not count medical collection accounts and charged off collection accounts and are ignored. Each individual mortgage lender can have mortgage lender overlays on medical collection accounts and charged off accounts.
- Mortgage loan borrowers can qualify for FHA Loans with unpaid non-medical collection accounts without having to pay it off or without a written payment agreement. However, if the unpaid collection balance is great than $2,000, then 5% of the unpaid balance will be used as a monthly debt payment obligation and be used to calculate the mortgage loan borrowers debt to income ratios.
- FHA Loan Programs allow for non-occupant co-borrowers to be added on the mortgage loan in order to qualify.
- Borrowers with prior bankruptcy and foreclosure can qualify for FHA Loan Programs as long as they have waited two years after a Chapter 7 Bankruptcy discharge and three years after the recorded date of foreclosure and/or recorded date of deed in lieu of foreclosure and three year waiting period after the date of a short sale.
- FHA Loan Borrowers can get their down payment gifted by a family member and/or relative with a gift letter which states that the home buyer is not going to pay the gift funds back and that the gift funds is not a loan but merely a gift. 100% gift funds are acceptable.
Gustan Cho Associates
If you are shopping for a mortgage lender with no lender overlays, contact Gustan Cho Associates . Gustan Cho and his associates are experts in FHA Loans, VA Loans, USDA Loans, Conventional Loans, Jumbo Loans, and Portfolio Loans. Gustan Cho Associates are also commercial loan specialists and hard money lenders. Gustan Cho Associates is also associated with Doctors Funding Group, a direct lender where it offers unsecured financing to healthcare professionals such as medical doctors, dentists, veterinarians, pharmacists, physical therapists, and chiropractors. If you need a no mortgage lender overlay lender, contact Gustan Cho directly at 262-716-8151 or email Gustan Cho Associates at GustanCho@Outlook.com.