Current Mortgage Rates: Richmond, VA
3.875% (3.915% APR) 30yrs
3.250% (3.282% APR) 15yrs
as of 06/24/19
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Mortgage Blog

Jun 8

Becoming a Homeowner When You Don't Now Qualify For a Mortgage

Lease-to-own contracts (LTOs) and land contracts (LCs) are different legal ways to transfer occupancy of a property from an existing owner who does not want to occupy it to someone else who does, but who cannot qualify now for the financing required to purchase it outright. Both LTOs and LCs offer wannabee owners the right to occupy a house for a period during which they can improve their capacity to qualify for the financing they need to complete the deal.

Note: The LC designation includes what are called “contracts for deed” which are used in the same way. Detailed provisions of both vary from state to state.

The LTO Transaction

With an LTO, the new occupant becomes a tenant and the current owner becomes a landlord who offers the tenant an option to purchase the house within a specified period. The tenant will need a purchase mortgage when the time comes.

As an example, assume a house appraised for $100,000 that cannot be sold outright at that price but the price is acceptable as the option price under an LTO. The renter/buyer has the right to occupy the house with an option to buy anytime within 18 months for $100,000 in exchange for a non-refundable option fee of $1500 and monthly rent of $900 for 18 months. If the wannabe buyer cannot qualify for the mortgage required to exercise the option within the 18 months, her option lapses and she must vacate at the end of the period.

The LTO offers the wannabee homeowner an opportunity to bet on herself. To become a homeowner, she must either improve her credit score, or accumulate the funds required for a down payment on a purchase mortgage, or both.

The LTO offers the seller a chance to obtain a better price than is otherwise available. If it turns out that the buyer cannot complete the transaction, the seller retains the option fee and rent, and recovers the house, perhaps to offer it again to another wannabee owner. If the seller had a mortgage, it would not be affected by an LTO that fizzled.

Price changes that occur during the option period do not benefit the wannabee owner. If the house declines in market value, purchase at the option price becomes less attractive. If the house appreciates in value, purchase at the option price becomes more attractive, but the capacity to make the purchase will not increase. The maximum available mortgage amount will be based on the option price, not the current market value, so that the required down payment will not change.

The LC Transaction

With an LC, the new occupant purchases the property with financing provided by the seller, who becomes a lender. But legal title does not pass until the loan is paid off, which requires the new occupant to refinance.

As an example, under the LC, the wannabe buyer pays $100,000 for the house, including $1500 in cash as a down payment, with the seller providing a loan for $98,500. The monthly payment of $900 covers the principal and interest plus taxes and insurance, with the loan balance of $96,658 after 18 months due at that time. If the wannabe buyer cannot refinance, the owner does not transfer legal title and can take steps to have him evicted.

To wannabee owners, an important difference between LTO and LC deals is that completing the first requires a purchase mortgage while completing the second requires only a refinance of the mortgage granted by the seller. Closing costs are lower on a refinance, and the down payment required is smaller. The $1500 that went into the seller’s pocket as an option fee on the LTO became buyer equity on the LC.

Furthermore, since the equity required on the refinance is based on a current property appraisal, an increase in market value during the 18 months will reduce and could even eliminate the need for the buyer to come up with additional cash. In the example, a lender imposing a 10% equity requirement on refinances would refinance the entire $96,658 balance after 18 months if the market value of the house had risen to $107,500.

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Sep 4

Choosing the Best Type of Mortgage

Mortgage borrowers having to choose between the different types of mortgages face a puzzle, which may be
particularly perplexing today. Interest rates remain low by historical
standards, the spread between fixed and adjustable rates remains large, but
expectations are widespread that all rates will soon increase – unless the
current collapse of stock prices causes rates to drop again. The
challenge to borrowers who must make a type-of-mortgage decision in this
environment is also a challenge to anyone presumptuous enough to offer them advice.

My response to that challenge has been to develop decision rules that indicate the circumstances under which each of
the major mortgage types should be selected. I will illustrate with a
hypothetical mortgage of $405,000 on a $450,000 single-family home to a
high-credit score borrower at the competitive prices posted on my web site on
August 21. The interest rates cited are for loans carrying zero or close to
zero origination fees. The numbers used are designed to provide readers with a
feel for the magnitudes involved, but the decision rules are not dependent on
them.

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Jul 31

Why Small Home Mortgage Loans Are Hard to Find

Providing small mortgage loans at non-subsidized prices
affordable to the borrower has always been a challenge. The core problem is
that the high cost of originating and servicing a mortgage loan is no smaller
for a small loan than for a large one, but the dollar amounts of interest and
origination fees received by the lender are smaller on small
loans. The obvious remedy, charging a higher interest rate or upfront fees on
smaller loans, may make it unaffordable, may be interpreted as “price-gouging”,
and may invite the attention of regulators.

Home mortgage lenders prefer to avoid these problems by setting minimum loan
amounts, which today are generally in the range of $50,000 to
$75,000. Below $50,000, mortgage loans are generally not available. This
is a problem for isolated communities in which home prices are very low, and
also for borrowers anywhere who are looking to refinance small loan balances.

The Problem of the Small Isolated Town

"In my town, we need mortgage loans from $5,000 to
$30,000, and they just aren’t available. Is there anything that can be
done?"

The town is Winters, Texas, population about 3,000. There
are few jobs there or anywhere very close, and median household income is about
$26,000. Houses in Winters sell for less than $60,000.

Mortgage loans are not available in Winters. In part, this is because the town
is so isolated and the demand so small that it can’t support a lending
facility. There are no appraisers, for example; if one is needed the cost will
be double the cost in a larger center because of the time it takes for the
appraiser to get to Winters and back.

The combination of exceptionally high origination costs and
exceptionally small loan amounts is deadly. The best option for residents of
Winters who need funding is an unsecured loan, as discussed below.

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Jul 24

Mortgage Qualification Rules Are Not Always Black and White

Some of the more interesting questions I receive from
readers are about unusual situations that may affect their ability to qualify
for a mortgage. The rules are not always crystal clear, which is why
lenders continue to rely on underwriters whose stock in trade is good
judgment. Here are a few illustrations.

Will the Spouse’s Unprofitable Business Derail the
Application?

“I have W-2 income with the same employer for over 10 years that is sufficient to carry the
mortgage amount we are requesting. My spouse is self-employed and has had
business losses for the past 3 years. These losses are deducted from the
adjusted gross income reported in our joint tax returns. We will own the house
jointly. Question: Should I leave my self-employed spouse off the
mortgage application?”

I would submit the application in your name with your income, indicating that title will be held
jointly. This is common and what most couples do when only one is working but
both will own the house. You proceed just as you would if your spouse was not
employed. If the underwriter is satisfied with the transaction, which is very likely because of
your high credit score and down payment of 20%, that will be the end of it.

There is the possibility, however, that the underwriter will
request your tax return. Before the financial crisis, this seldom happened when
an applicant could document income with W-2s. Now it happens
occasionally. If it happens in your case, the underwriter will see
the losses, and in the worst case, will decide to deduct the losses from the
income used to qualify. The more likely possibility, however, is that the
underwriter will elect to ignore the business losses because you can document
that the losses have been funded out of savings and not out of your income.
Another possible reason for ignoring the losses would be that they have come to
an end because the business has turned the corner, or it has been shut
down.

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Jun 25

Is Another Housing Price Bubble Looming?

The question is being asked with increasing frequency, and also with great anxiety.
The last housing bubble led to a financial crisis followed by a recession.

Many of those commenting on the question, however, don’t understand what a price
bubble is. It is NOT a marked rise in prices. Sharp price increases are common,
and pose no threat to the stability of the economy whereas price bubbles are
rare and do pose a threat.

A price bubble is a rise in price based on the expectation that the price will
rise. Sooner or later something happens to erode confidence in continued price
increases, at which point the bubble bursts and prices drop. What makes it a
price bubble is that the cause of the price increase is an expectation that the
price will increase, which sooner or later must reverse itself.

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