MORE ON FINANCING WITH KEVIN+JONATHAN
Bones, clams or whatever you call it in the parlance of the times.
Most people get a mortgage when buying their homes in San Francisco. We consider some of options, pitfalls and strategies that save you the most money and yet enhance your competitive advantage against all-cash buyers among others.
Financing in San Francisco, like everything else, isn’t like it is everywhere in the country as high property prices render most mortgages moot here.
And How Are We Paying Again?
For many buyers in San Francisco the most stressful part of buying property is paying for it. And who would blame them? Property prices have averaged annual gains of 7 percent or more historically with the average appreciation rates for the past few years pushing anywhere from 15 percent to more than 40 percent gains from one year to another depending on the neighborhood. The trend only accelerated during the Pandemic for houses and roomier condominiums.
And given that those who could afford to buy a home were saving money up during the course of the Pandemic and because mortgages have been so very low lately, it’s no wonder why the housing market has regained confidence as more cash and more buying power go hand-in-hand.
Apart from wrapping their minds around this type of price growth, a lot of our buyers might also get needlessly discouraged thinking that they cannot compete with all-cash offers when the reality is that they can — with our guidance of course.
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’ll review offers and glean insight as to which offer to accept, i.e., how plausible is it that a given loan will close.
Remember that your case is probably unique and what follows now is only for general consumption.
Putting a down payment that’s more than 20 percent will bolster our offer’s appeal especially if an offer prices pushes past nearby comps and an appraisal is in the mix — we’ve had plenty of buyers win the offer process without being the highest offer but the best offer because of details like this.
Because our real estate market is unlike most places, most online or out-of-town home lenders aren’t going to work here. It’s far more advantageous to work with a local lender who is known to seller agents — we’ll help you out on this one.
The most common loan — a 30-year fixed requires a 20 percent down payment — but it may not be the best to get especially for your first home as you're probably not going to live there for 30 years, right? So why pay for 30 years of what is essentially price insurance?
Your loan’s mortgage rate will get locked after our purchase contract is accepted and will be locked for 60 days in most cases. Extending that rate lock can be costly. If rates fall in during the escrow some lenders will relock your rate. Also, if rates go down after you close you may be able to do a technical refinance on your mortgage within 6 months of close.
Lenders will look at your monthly (gross) debt-to-income ratio (DTI), credit history and financial documents as they evaluate your mortgage application. Tip: Go into an informal credit stasis until we’re done with your purchase by minimizing any credit profile changes that add more debt, e.g., no new car leases or credit cards, Also, don’t close any account or credit card and if you have a credit freeze on your reports, lift it so the lenders can pull your credit.
Loan underwriting is bifurcated — the underwriters will look at your creditworthiness and the property’s value. Tip: Don’t wait until we find the property to get the process started; we should get you fully underwritten (or as close to it) prior to making an offer.
When you’re evaluating a lender make sure you consider the following apart from the interest rate: how fast they can close; on-deposit requirements; prepayment penalties (if any); post-close reserve amounts (i.e., how much money needs to be left over after you close your purchase and, what types of assets can be counted towards this amount); and, any origination points or buy-down points.
Cash buyers may rule the roost but many folks will use cash to purchase a property in the short term but will get a mortgage after close of escrow.
The Totem Pole of Pay
Okay, How Are We Going to Pay Today?
If you’re financing your purchase, there are a wide variety of loan products available for single family homes, condominiums, multi–unit buildings, investment property, rehab properties and mixed–use properties (take a look below). Just as there’s a variety of properties there are just as many options as there are types of properties.
Gather These While Ye May:
If you’re applying for a loan, be sure to get ready to scan/PDF and/or ask for a lot of the following information for your would-be lender. Be sure to keep copies as it’s likely that you’ll be asked for the same docs many times and start early. There will be tons of questions, clarifications and digging for docs that can add a lot of time to the pre-approval and approval process, which may lead to unnecessary delay in getting your financing ready that will lead to a weaker offer. Best practice is to get ‘super approved’ (i.e., fully underwritten) first and after we get your next property into escrow all that will be left is to confirm your creditworthiness and the property’s condition and contract price (by appraisal)
In the meantime, you should gather up these (and other) documents so your lender can get started early...
- Last 2 years of W–2s &1040s for self–employed and/or tax returns (personal & business returns FILED (e.g., 1120, Sched. K–1)
- Last month of pay stubs & employer verification/ability to do so easily
- Last 2 months bank statements (checking, savings, IRA, Money Market, etc)
- Credit report fee (banks pull their own) or provide your own to avoid multiple inquiries
- Photo I.D. (Driver’s License, Passport, Green Card, etc.) (VA letter/certification)
- Landlord contact information/12-24 months proof of rent payments (i.e., canceled checks, statements, etc.)
- Gift Letter from relatives/investors; don’t forget they can ‘loan’ you money through forgivable loans
- All cash? Funds verification/bank statement
- Changing jobs? Offer letter from new employer AND 1 pay stub from new employer
- For current homeowners: current mortgage statement/listing contract
- Whatever underwriting requests such as explanatory letters for any special cases or situations
(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).
A Sampling of Mortgage Types
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, has a conforming loan limits well above those in the rest of the country. For 2022, the FHA conforming loan limit is $970,800 for condos and houses; $1,243,050 for 2-unit buildings; $1,502,475 for 3-unit buildings; and, $1,867,275 for 4-unit buildings.
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 requirements vary and may be more lenient than the maximum 45 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.
The power of the conforming conventional loan is that there are times where the exceptions that can be made for X, Y or Z, things like property condition, income questions, credit history, may be more wide encompassing than their jumbo loan brethren. The lending guidelines are hundreds of pages long with charts and tables and questions, so it definitely requires professional help to wade through it all. Check out FannieMae’s site here for updated limits and explore some too while you’re at it to learn more.
Jumbo Loans (20+ Percent down)(or in excess of the conforming loan limit)
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) (Due to higher limits, may be possible to use 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. Current 2022 loan limits range from $970,800–$1,867,275 for 1 to 4 units. Note: paying additional Mortgage Insurance Premium is required until the borrower reaches 20 percent + 1 month payment equity (the owner’s share vs. the bank’s share). At that point a borrower may well 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 condo building must be ‘FHA-approved’ before an FHA loan is approved (most aren’t), these loans are rarer 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.
FAQs on Home Lending
Stability, Predictability and Consistency Required?
Do You Really Need a 30-year Fixed Mortgage? Is it price insurance or peace of mind?
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.
Shop Local: Can I get an out-of-town or online lender?
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?
Your Credit Stasis: Before and During — Especially Once We are in Contract
The last thing we want is to have a surprise come up during an escrow in the last stretches of the purchase at hand. Apart from ensuring your credit report is mistake-free and correct before we start the application and underwriting process, you’ll want to go into a credit stasis to boost your credit/FICO scores but also to ensure your credit profile remains consistent as your loan application snakes its way along the long way through a lender's backend underwriting process.
So, remember that there should be:
- NO incoming gift monies unless and until your lender says it’s okay — especially from foreign accounts
- NO new credit cards or applications for those
- NO new cars, car leases or anything where your credit score will change
- NO cash deposits larger than $4,000 without an explanation of its source
- NO unnecessary credit inquiries from shopping for loans from online lenders and don't forget the bank will get its own version of your credit report
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.