Understanding The Appraisal Gap

Appraisal Gap

Appraisal GapDuring a home purchase transaction, a mortgage lender will request a home appraisal to ensure that the amount being lent for the home does not surpass the home’s true market value. A home appraiser acts as an unbiased third party and will assess components of the house, such as size, condition, improvements, upgrades, and even sale prices of comparable homes in the area. When the appraised value of the home comes in at a lower amount than the contracted sale price, this is called an appraisal gap. In today’s housing market, supply is low, demand is high, and home prices are increasing to record levels. In May 2021, almost 20% of home sale transactions nationwide had a contract price that was higher than the home’s appraised value.

Unfortunately, appraisal gaps can negatively impact homebuyers. In many cases, buyers are asked to bring more cash to the closing to “close the gap” between the appraised and contracted value. Additionally, lenders use the lower of the appraised and contracted values to determine the borrower’s loan-to-value ratio. A loan-to-value ratio, or LTV, is the relative difference, expressed as a percentage, between the current value of the home and the loan amount. In other words, it’s how much of a property a borrower owns versus how much of a property the bank still owns. An appraisal gap can increase a borrower’s LTV making it necessary for them to pay mortgage insurance.

As a buyer or a seller, if you find yourself in a situation where you are facing an appraisal gap, lean on your real estate agent as your trusted advisor to help you determine the best course of action. Your agent can help you understand your best options and handle any additional negotiations needed.

What Is a Mortgage?

What is a mortgage?

What is a mortgage?

Purchasing a home will likely be the largest financial debt you will incur in your lifetime. While borrowing a large sum of money may feel overwhelming, buying a home is an excellent investment in your future. When you are ready to buy a house, you will need a mortgage loan. Put simply, a home mortgage is a loan given by a bank or lender to help finance the purchase of a house. The mortgage is usually paid back monthly over a period of many years until the loan balance is eventually brought down to zero.

Let’s explore the components of a mortgage:

Collateral – When you agree to a mortgage, you sign a legal contract stating that you will repay the amount borrowed in addition to interest and other terms. The house acts as the collateral for the loan. If you do not repay the loan, the lender can take the house back through the process of foreclosure.

Principal – This is the total amount of money borrowed to purchase the home. The principal balance does not include any other factors, such as interest or taxes. You can lower the principal amount of a mortgage by putting a down payment on the home.

Interest – Interest is what the lender charges you to borrow the money. This is expressed in a percentage called an interest rate.

Taxes – Your mortgage will also likely include property taxes, which vary by location and the value of your home.

Insurance – Required by the lender, homeowner’s insurance protects your home and personal property from losses against fire, weather, and theft. If you make a down payment less than 20% of your home’s total value at closing, you may be required to pay private mortgage insurance, which protects the lender from a default on your mortgage.

When you are ready to buy a home, I would love to meet with you to further discuss the mortgage process. Call me today to set up an appointment!

Understanding Closing Costs

an approved mortgage application form and a key

an approved mortgage application form and a keyClosing costs are fees paid as part of a real estate transaction. Because a home purchase is a contract between a seller and a buyer, and the property changes hands, various costs and several people are involved.

Most home buying situations involve four categories of closing costs:

Lender costs – With any home loan, costs are incurred by the lender to pay the processor, underwriter and closer. These costs are generally passed on to the buyer. Loan origination fees may also come into play, depending on the type of loan the buyer is securing.

Third-party expenses – Credit reports, property appraisals and inspection fees are paid to a third-party vendor for providing or performing these services.

Legal fees – Attorney’s fees, title search fees, title insurance and recording fees are costs that may fall into this category.

Pre-paid expenses – Interim interest, homeowners insurance and property taxes are ongoing costs of homeownership that may be paid in advance, upfront at closing.

In some situations, it can be negotiated in the purchase contract to have the seller pay some or all of the closing costs. Your real estate agent can explain more about this process and help you negotiate, but the more you know about closing costs before you apply for your mortgage, the better! When you are ready to purchase a home, I would love to talk with you about your buying options. Give me a call today!

What to Look For in a Mortgage Planner

A young family talking to their LO

Finding the right mortgage planner is no different than hiring someone for a job. It is easy to think about the process more than the person, but choosing your mortgage planner is no different than hiring a lawyer or an accountant. This person will guide you through the largest financial transaction of your life, so don’t leave it to chance with an online stranger or being one of hundreds of applications stacked on a banker’s desk.

It is important to ask the right questions of the mortgage planner with whom you may work. To remember the right questions to ask, use the acronym, “PRESS.”

Process

Ask your prospective lender to walk you through the homebuying process. As a first-time homebuyer, you are going to need someone who can explain the steps to you and make sure things run seamlessly. The loan process requires a great deal of paperwork and can be extremely overwhelming. Often you will have to provide employment and credit verification and income and asset verification multiple times before closing. You want to choose an expert to answer all your questions and concerns to alleviate your stress.

Rates

Ask your prospective mortgage planner what their mortgage interest rates are based on, and ask about the current economic report and factors that could cause movement in the current rate. A loan professional should have the economic report information readily available and explain the impact this will have on your rates. They should also be able to elaborate on why mortgage interest rates are based on mortgage-backed securities or mortgage bonds.

Experience

Ask the loan officer to tell you how long they have been in the mortgage industry. The more experienced they are, the more likely they are to have dealt with any problems during the homebuying process. If you encounter an issue, a more experienced lender is more likely than a beginner to have the insight to easily solve your problems. If any problem arises, your mortgage planner can simply walk down the hall to discuss your loan.

Specialty

To make certain the person you choose is going to be a good fit for your particular loan product, inquire about their area of expertise. Someone with specific experience in purchasing is going to be much more beneficial to you than someone who specializes in refinancing. Our experienced Mortgage Planners cover all facets of lending.

Success

Ask your prospective planner how many loans they have closed in the past year. This is a good indicator of how successful they have been in helping people achieve their goal of affording their dream home. Ask to see some recommendations or simply look them up on LinkedIn or do a Google search of their company’s reputation. Luckily, you will have no surprises when you research us.

Finding a mortgage planner with whom you feel comfortable and who is compatible with your needs is the driving force behind this huge financial decision. The right person should check all these boxes and be able to answer all of these questions, and more, in great detail. They should be able to thoroughly explain the process as well as work through any possible problems that may arise. We have only the best team working with us. Call me today to learn more.

What Does it Mean to Refinance?

A miniature house over a stack of cash

A miniature house over a stack of cash

Mortgage rates are low nationwide, but the markets are fluctuating. Now may be the right time to refinance your home mortgage. As your Mortgage Planner, I would love to review your current rate with you to determine if this may be the ideal opportunity to refinance your mortgage loan.

By refinancing your home, you are paying off the current mortgage loan with a new mortgage loan with rates and terms that better serve your financial interests. The refinance process is very similar to the purchase mortgage process. We will require a new home appraisal (which we order) to determine the current value of your home. We will also verify your employment, calculate your household income and ongoing debts, and make sure that you are qualified for the new mortgage loan.

One of the most beneficial reasons for refinancing a mortgage is to save money on interest expense and monthly payments. Homeowners can choose to invest their monthly savings back into the home to pay it off more quickly, save or invest the funds elsewhere, pay down other debt, or pay for future expenses such as college or retirement. By decreasing the terms of your mortgage, you are also saving money on interest over the life of the loan.

Take advantage of current interest rates and refinance your home. I would love to meet with you to assess your financial goals and see if refinancing your home is right for you. Call me today to set up an appointment.

Understanding Homeowners Insurance

Home Insurance typed out in black and bold letters on a piece of paper

Home Insurance typed out in black and bold letters on a piece of paperSafeguarding your home is critical, as it is likely one of your largest investments. Homeowners insurance protects your home, its contents, and other assets in the event of fire, theft, accidents, or other disasters.

A standard homeowners insurance policy will provide coverage for costs related to:

  • Damage to the interior and exterior of your home
  • Loss or damage to personal belongings
  • Personal liability for damage or injuries caused by you or your family
  • Hotel or house rental while your home is being repaired

An important factor to consider when selecting a homeowners policy is how much coverage you need. Your policy should cover enough to rebuild your home if it were to be destroyed completely. It may be a good idea to ask a homebuilder to walk through your home and estimate what it would cost to rebuild. You can use that figure as the basis for how much replacement coverage you would need on your home. In addition, if you have exceptionally valuable items such as art pieces or family heirlooms, you likely need to purchase additional coverage. Walk room by room and calculate how much it would cost to replace the contents of your home. Be sure to include furniture, televisions and electronics, clothing, jewelry, shoes, and other items.

Consider the location of your home. Most standard policies will cover damage to your home as a result of fire or fallen trees, but will likely not cover damage from earthquakes or floods. Homeowners living in an officially recognized high-risk area for floods are required by law to have flood insurance. To find out if your home is a flood risk, click here. Homeowners living in areas extremely susceptible to earthquakes are also often required to have extra coverage.

When deciding which insurance policy to choose, consider the deductible. Like all other types of insurance, you should opt for the highest deductible you can afford, as this will cause your insurance premium to be lower. There are also many factors that you may not be aware of that can change the cost or coverage, such as owning a trampoline or having certain breeds of dogs. Additionally, you may save on your policy if you have an alarm system.

I would be happy to refer you to someone who can give you fantastic advice on homeowners insurance. Call me today to set up an appointment!

Mortgage Terminology

A dictionary with the word Mortgage in bold

A dictionary with the word Mortgage in boldThere are many words that we use to describe everything from how a loan matures to various documents and programs that may be unfamiliar to you. I will explain some of the terms that we use most often in mortgage lending to help you gain a better understanding of some of the terminology you may hear when acquiring a mortgage.

Amortization – The repayment of principal from scheduled mortgage payments exceeding the interest due. By subtracting the interest from the scheduled payment, you will obtain the amortization. 

Balance – The amount of the original loan that remains to be paid. By subtracting the sum of all prior payments from the loan amount, you will obtain the balance. 

Cash-In Refinance – Paying down the loan balance to reduce loan-to-value ratio in a refinance transaction. This is often done to help the borrower qualify for a lower interest rate or reduced mortgage premium. 

Debt Consolidation – The process of using a new, more favorable loan to pay off several unsecured debts. 

Equity – The difference between the value of the home and the balance of outstanding mortgage loans on the home.

Fannie Mae & Freddie Mac – Two government agencies that purchase mortgages from lenders and resell them to investors. 

Grace Period – The period of time where a loan payment may be made after its due date without incurring a late penalty.

Home Equity Line of Credit (HELOC) – A loan against your home where the lender agrees to give a buyer a line of credit. The collateral is the borrower’s equity in his or her house. Generally, a HELOC is a second lien / mortgage behind the borrower’s first mortgage. 

Interest Accrual Period – The period in which the interest due to the mortgage lender is calculated. 

Jumbo Loan – A mortgage greater than Fannie Mae and Freddie Mac’s conforming loan limit, which is generally $424,000. (depending on what area of the country you’re in, loan amount may vary) 

Knowledge – A good mortgage planner will know all of their mortgage guidelines. It is important to hire someone who knows and understands the mortgage industry.

Loan-to-Value Ratio – The mortgage loan amount divided by either the selling price or appraised value of the home, whichever is less.

Maturity – The period of time until the last payment is due on a loan. In most cases, this is the term of the loan.

Note – Legal statement showing the terms of debt and a promise to repay it.

Origination Fee – A fee that a lender charges for evaluating and processing the loan. This is usually expressed as a percentage. 

Payment Period – The frequency with which the borrower is obligated to make payments. In most cases, the payment period is monthly.

Qualifying Ratio – The comparison of a borrower’s expenses, such as housing or debt to their income. 

Refinancing – The act of paying off a loan with the funds from a new loan on the same property.

Start Rate – A pre-determined interest rate that will be applied to a loan until the date of the first interest rate change. 

Term – The number of years until a loan is to be fully paid off. 

Underwriting – Verifying data and evaluating a borrower’s loan application. The underwriter gives the final approval of the loan. 

VA Loan – Home loans that are available to U.S. veterans and are guaranteed by the U.S. Department of Veterans Affairs. 

Walkthrough – The final inspection of a home to inspect for damages or problems that may need to be fixed before closing.

eXtraordinary Operations Department – Make sure that the company you choose for your loan has a talented processing and underwriting team.

Year-End Statement – A report showing how much interested was paid during the year and the remaining mortgage balance owed.

Zoning Ordinances – Local laws that determine building codes and regulations on the use of a property.

As your Mortgage Planner, I am happy to answer questions that you may have and provide you with more insight on loan programs that may be of interest to you. Call me today to set up a time when we can meet to discuss your home mortgage needs!

Home Appraisal Basics

repair, building and home concept - close up of male hands writing in clipboardIf you have experienced the home buying process, you have likely heard of a home appraisal. Home appraisals allow the buyer, seller and lender to determine the fairest sales price possible for the home based on a variety of factors. Here are some basics about appraisals:

What is a home appraisal?

A home appraisal is a determination of a home’s true value. To ensure that this value is unbiased, a professional home appraiser conducts the appraisal.

Who requests the home appraisal?

A home appraisal is requested by the lender to verify that the money asked for by the borrower is an appropriate amount. The lender cannot request a specific home appraiser, so one is assigned from a pool of appraisers.

How does the appraiser determine the value of the home? 

Many factors are considered when determining the home’s appraised value. Through many processes such as home walk-throughs, property walks, and additional reviews, the home appraiser will assess the property size, condition of the exterior and interior of the home, as well as improvements and upgrades that have been made to the original structure.

How can the homeowner increase the appraised value?

Simply by making sure that the home is clean and free of needed repairs, the homeowner can increase the appraised values. Some common repairs that should be addressed include cracks, stained walls or carpets, damaged flooring, leaky faucets, and broken or damaged windows. It is also important for homeowners to assess the exterior of the home. Repainting trim, cleaning garage doors and siding, and touching up landscaping can all add to the appraised home value.

As a homebuyer, it is in your best interest to know the house’s value compared with similar homes in the market, and it is required to receive your home loan approval. I am happy to talk you through the appraisal process and answer any questions you may have.

What Is the Role of a Mortgage Underwriter?

business, tax, office, school and education concept - man filling a form

business, tax, office, school and education concept - man filling a formAfter a mortgage application has left the hands of the processor, it moves to the desk of the underwriter. The underwriter acts as a gatekeeper in the loan approval process. When purchasing a home, the loan cannot close or be funded without the approval of an underwriter.

Mortgage loan approval is contingent upon several factors such as your credit history and perceived risk. It is the job of the underwriter to make sure that all of these factors meet the particular loan guidelines. In addition, the underwriter makes sure that all of the income, title, insurance, credit and asset documentation, and closing documentation are in place. The underwriter has final approval and final responsibility for the loan. If the loan is denied, it can be appealed, but the facts must be in place to support any change of an underwriter’s decision.

When you are ready to purchase a home, I would love to talk to you about your home buying options. Call me today to set up an appointment!

What to Look For in a Mortgage Planner

mortgage planner shaking hands

mortgage planner shaking handsFinding the right Mortgage Planner is no different than hiring someone for a job. We tend to think about the process more than we think about the person, but your Mortgage Planner is no different than hiring someone to give you advice about financial planning such as a lawyer or an accountant. This person will be guiding you through the largest financial transaction you may ever make, so don’t leave it to chance with an online stranger or being one of hundreds of applications stacked on a banker’s desk.

You then need to ask the right questions of the Mortgage Planner you want to work with. To remember the right questions to ask, use the acronym PRESS.

Process:

Ask your prospective lender to walk you through the process. As a first time homebuyer, you’re going to need someone who can explain the steps to you and make sure things run seamlessly. The loan process requires a great deal of paperwork and can be extremely overwhelming. It is not uncommon to have to provide employment and credit verification and income and asset verification multiple times before closing. You want someone who is an expert and can answer all your questions and concerns to alleviate your stress.

Rates:

Ask what their mortgage interest rates are based on, about the current economic report, and what could cause movement in the current rate. A loan professional should be able to have the Economic Report information readily available and explain what kind of impact this will have on your rates. They should also be able to elaborate on why mortgage interest rates are based on Mortgage Backed Securities or Mortgage Bonds.

Experience:

Ask how many years the loan officer has been in the industry. This is important because the more experienced they are, the more likely they are to have dealt with any problems in the process. If you were to come across an issue, a more experienced lender is more likely to have the insight to easily solve your problems than a beginner. If any problem should arise, your Mortgage Planner can simply walk down the hall to discuss your loan.

Specialty
:

It is also a good idea to inquire about their area of expertise. You need to make sure the person you choose is going to be a good fit for your particular loan product. Someone with specific experience in purchasing is going to be much more beneficial to you than someone who specializes in refinancing, but our experienced Mortgage Planners cover all facets of lending.

Success
:

Ask how many loans they have closed in the last year. This is a good indicator of how successful they have been in helping people to achieve their goal of affording their dream home. Ask to see some recommendations or simply look them up on LinkedIn or Google their company’s reputation. Luckily, you will have no surprises when you research us.

Finding a Mortgage Planner that you feel comfortable with and that is compatible with your needs is the driving force behind this huge financial decision.  The right person should be able to answer all of these things and more with great detail. They should be able to thoroughly explain the process, as well as work through any possible problems that should arise. Call me to start!