If you’re a buyer needing or considering a mortgage, take a gander at the following general points you should keep in mind as we proceed with our work together. If you’re a seller, going through this material also will inform you as to how we review offers when they come in and glean insight as to which offer to accept, i.e., how plausible is it that this loan will close.
Remember that your case is probably unique and what follows now is only for general consumption.
(Remember we’re not financial or mortgage experts, the information here comes from our clients’ experiences as well as our own; your case may vary).
ALL CASH TODAY (100 percent down; mortgage later?)
As the name implies, this is when you simply pay the entire purchase price in cash. Naked cash offers without contingencies for appraisals, inspections or otherwise are stronger while cash offers with short close periods (e.g., 7, 10, or 14 days) are the strongest in most cases — otherwise impact may be diluted if other buyers strong and highly qualified. Best to offer all-cash in competitive situations or when competing against folks needing financing where property may not appraise at contract price as appraisals tend to lag by a few months. Also, many all-cash folks will get a post-close mortgage (at a slightly higher interest rate than a new purchase loan) to put their new property to use as an asset on which they can borrow cheaply. Think about those early startup monies and not having to cede vast amounts of your company early on.
Conforming Conventional (20 percent down)
Conforming loans are ones that comport with Freddie and Fannie loan guidelines (maximum loan amounts)
San Francisco, being one of the most expensive markets in the country, conforming loan limit is not the $424,100, it’s $636,150 (2017/2018)
Typically, these are fixed rate, 30–year (or 15) with no pre–payment penalties and a minimum of a 20 percent down payment. Borrower’s debt–to–income ratio requirement usually must be 38 or 40 percent, i.e., no more than 38 or 40 percent of your monthly gross income can be spent on the mortgage payment. Sometimes the lending guidelines for conforming conventional loans are more stringent than Jumbo loans. Credit score expected: 740.
Jumbo Loans (20 Percent down)
Terms will vary by lender but this is the class of loan that you’ll likely use in high-priced San Francisco; some can be 30-year fixed, others can be 3-, 5-, 7-, 10-, or 15-year Adjustable Rate Mortgages (ARMs) whereby mortgage rates are locked for a shortened period of time as opposed to the standard 30 years. Most times loan limits will be somewhere in the $2-$3 million range with loans being approved in 10-20 days with similar documentation requirements that conforming loan lenders will apply but when issuing jumbo mortgages, lenders tend to be more lenient than Freddie and Fannie guidelines. Jumbo lenders are the ones who set the underwriting guidelines after all as they decide how they’ll hold your loan or package it as a security. Most jumbo mortgage rates tend to be 1/8th point higher than conforming conventional loans but the underwriting terms worth it.
80 – 10 – 10 (10 percent down)
Mortgage insurance is required for borrowers who put down less than 20 percent toward a property’s purchase price for buyers using one mortgage. But for well-qualified buyers it may be possible to put down 10 percent and borrow the other 10 percent as a second mortgage or a home equity-based line of credit which eliminates the insurance premium. In exchange, the second mortgage’s interest rate is higher, additional closing costs are incurred and tax deductibility is reduced. Strong credit (mid-700s) required.
FHA LOANS (3.5 percent down) (Essentially not used in the City)
For these loans, down payment can be as low as 3.5 percent of the purchase price, and most of your closing costs and fees can be included in the loan. Loans are fixed rate, long–term, larger allowance for borrower’s debt–to–income ratio requirement – up to 51 percent in some cases. But from Great Recession highs recent loan limits have fallen to $636,150–$1,223,475 for 1 to 4 units. Worse, paying additional Mortgage Insurance Premium is required for the life of the loan with the goal of the borrower reaching 20 percent + 1 month payment equity (the owner’s share vs. the bank’s share) so that borrowers will then refinance into a conventional loan. Origination fees of at least .25 point and MIP can add several hundred dollars to a monthly mortgage payment (1 percent of purchase price). Credit score expected: 720. But because of the high cost of San Francisco and the fact that a building must be ‘approved’ before an FHA loan is approved, these loans are pretty much useless in the City.
SPECIAL LOANS: CENSUS TRACT (3–10 percent down)
There are certain loans available for specially-designated qualifying Census tracts. The designations are based on U.S. Census median income data which will highlight areas that need a boost. Borrowers must earn less than a set amount or the property must be in a designated and qualified tract. Not all lenders will have this program and the areas can change over time. The main benefit is that these loans will allow buyers to put as little as 3–5 percent down to purchase a property but have no mortgage insurance payments for the life of the loan.
SPECIAL LOANS VA LOANS (3.5 percent down)
Government loans for active service members and qualified veterans will allow borrowers to put as little as 3.5 percent down to purchase a property and have no mortgage insurance payments for the life of the loan. These loans take longer to process as there’s more paperwork involved especially if the purchase is in an unapproved condo building, which will often render VA-loan based offers less competitive.
SPECIAL LOANS: PRIVATE HARD MONEY
As the name implies, these loans are not loans from the usual suspects (or, if they are, these are the most aggressive, higher-risk loans they have). These may be locally held portfolio loans. These are the most flexible, short-term and expensive loans to get. Usually required for unique situations where property is not otherwise lendable or if cash isn’t an option.
SPECIAL LOANS: BRIDGE LOANS + DEPARTING RESIDENCE LOANS
Type of loan that allows you to buy your next home while you still live in your current one with the expectation that you sell the current house once you close on the new one; usually 12-18-month time window. You may even finance your destination home’s down payment. Compare with other programs like a departing residence loan whereby you have your second home’s down payment already. Rates and limits vary by circumstances.
When folks are pushing toward the upper limit of their budgets — and loan approvals — we night have to start looking for strategies to help lessen to load to attain that dream property our clients are aspiring to. One point we may have to stress is that most folks think they must get a 30-year fixed rate mortgage.
While predictability is great, another way to think about it is that having a fixed mortgage interest is something you may not need. 30-year mortgage rates are more expensive than shorter-term fixed rate loans by comparison. The rate difference is essentially price insurance for a loan you’re not likely to pay off fully.
Think about it this way: are you likely to be in the same property 30 years from now? Even so, you’re probably going to refinance the property due to increased equity (remember real estate price appreciation rates have outpaced inflation by 200% in the City for the past 20 years) or because you would have remodeled your property. Thus, ARMs are a good alternative as monthly payments could be lowered by hundreds of dollars which shift debt-to-income (DTI) ratios in your favor just enough to make that critical difference.
Real estate agents tend to go with what they know and can be creatures of habit. This extends to advising sellers to go with buyers and lenders they know will close (or, those who are the likeliest to close). Providing certainty is something listing agents love to provide their seller clients. So, why risk diminishing the strength of your offer with going with an unknown commodity when you can get the same or better locally?
So, remember that there should be:
This is an area where you must consult with your mortgage professional as well as a tax person and a financial one too. We can refer you lenders for many types of purchases, circumstances and scenarios — just ask.