Mortgage and Portfolio Loan Guide

Building Your Home with an FHA Construction Loan

Getting an FHA construction to permanent loan is a wonderful opportunity to build the home you want, with a lower down payment than most lenders require on a construction loan.

In this article we’ll cover all the main points you need to understand if you’re looking to build a home from the ground up with an FHA construction to perm loan.

How to Get an FHA Construction to Perm Loan

When existing home inventory is low, building your own home is often a very attractive idea. You get to select the location, the builder, the floor plan, the paint colors… everything! The problem is that most lenders want 10-25% down payment when considering terms on a construction loan.

With an FHA construction to permanent loan the down payment can be as low as 3.5%.

This low down payment option is extremely encouraging news to many borrowers looking to build a home.

Here are the top things you need to understand when considering an FHA Construction to Permanent Loan

Pre-Approval

First and foremost, you need to make sure you’re eligible for an FHA loan.non-warrantable condo

Get apply today to make sure you meet all income, credit, and asset guidelines. If you don’t meet normal FHA guidelines, there is no sense in seeking an FHA construction loan.

The good news is that FHA guidelines are less strict than other traditional mortgages, so many times it’s just a matter of getting a few ducks in a row to get the qualification in line.

Selecting Your Builder

Once you have gotten confirmation that you’re eligible for FHA financing, you’ll need to find the right builder for you.

You’ll want to see what work they have done in the past, how long they have been in business, what types of projects they are willing to take on, and how long they typically take to build a home with the same characteristics you’re seeking.

A very important thing to keep in mind is the chemistry you have with the builder. You’ll be communicating with this person heavily over the next 6-12 months. It’s super important that you feel comfortable with your builder from an experience and service standpoint.

Builder Approval

After you have selected the right builder to meet your needs, it’s time to get that builder approved with your lender.

With an FHA construction to permanent loan, not only do you have to be approved as a borrower, but the builder also must go through a detailed approval process. They’ll need to provide things like: references, two year’s tax returns, a year to date profit and loss statement, applicable licenses, and more.

Depending on the builder, this approval process could take 2-12 weeks. It really just depends on the availability of the builder to provide the documents needed.

Site Selection

If you have been pre-approved, and your builder has been approved, things are certainly moving in the right direction.construction to permanent loan lenders

At this point it’s time to select the right lot to build your home on. With an FHA construction to perm loan you can finance the land and the construction all in one loan. If you already own the land, even better. You are able to use the equity that you have toward down payment.

Example: you own a 2 acre parcel that you are looking to build on. Let’s say the lot is worth $20,000 and you own the land free and clear. The 20K in existing equity can be used as collateral toward your down payment.

Very important – FHA does NOT allow any value to be given to any existing buildings on the lot.

The appraised value of the lot will be based on raw land. If you have a barn on the land worth 20K, and the land is worth 20K, that does not mean FHA will consider it to be a full existing value of 40K. Only the land can be considered with regard to existing equity.

Project Approval

Once the site is selected, it’s time to get set figures from the builder regarding what the costs are going to be from start to finish.

When you have come to terms with the builder on the numbers, the lender will review the construction agreement and structure your loan accordingly. FHA does NOT allow the borrower to be involved with the construction in any way.

The builder must be responsible for all construction and improvements in the construction agreement. The borrower cannot act as the builder.

Loan Structure

FHA loans have limitations on how high the loan can be in each county in each state.

FHA construction to permanent loans are no different with regard to county loan limits. Here is a site that tends to keep county construction to permanent loan lenderslimits up to date.

During the construction period, the builder is responsible for covering monthly interest only payments on the construction loan. This creates a win/win scenario for builder and borrower. It’s a win for the builder because they know they payment will be made (they don’t have to rely on the borrower making payments to keep things moving along).

It’s a win for the borrower because if the builder is responsible for payments, they are more likely to treat the build with urgency because they don’t want to be stuck with carrying the construction loan payments for more months than necessary.

Once the home is completed, the loan is converted to the FHA loan for the borrower to begin making payments on.

Construction Contingency

There are typically changes to the materials or slight modifications to the specifics in the contract causing overages on top of what was originally estimated.

Construction contingencies are available for project cost overruns and borrower change orders. Basically, whatever the estimated cost and labor is, the lender will increase that estimated amount by 5% to account for unforeseen extras. If the funds are not used, the difference will be applied toward the principal balance (the loan will have a lower balance at the time it is converted from construction to permanent).

One Time Closeconstruction to permanent loan lenders

There are two different types of construction loans: one time close, and two time close.

A two time close means you get approved, get appraisal, and close on the construction loan. Once construction is complete, you get approved all over again, get another appraisal, and then close on your permanent loan.

With the FHA product, it’s a one time construction loan. This means you do NOT have to go through the process twice. You get approved up front, get appraisal up front, and close. Once the construction is completed, final inspection is done, a certificate of occupancy is provided, and the construction loan is converted into a permanent loan.

You do not have to get approved all over again on a one time construction loan.

Basic steps toward your FHA Construction Loan approval:

  • Get pre-approved
  • Get builder approvedfha construction loan
  • Select your lot
  • Complete construction/purchase agreement with builder/seller
  • Get project approved through lender
  • Complete loan approval (complete conditions with lender, appraisal, title, etc.)
  • Close on construction loan (provide down payment/costs/escrows)
  • Begin construction
  • Construction complete
  • Move into your newly built home, begin making payments on your FHA loan

Building a home is not a good fit for everyone.

There is more to manage and more decisions to be made when building a home than when buying an existing home. But if you are considering building a home, an FHA construction to perm one time close loan may be a great option for you to consider.

Not what you’re looking for? FHA 203k rehab loans here.


 

I invite you to reach out to me.

Get your questions answered.

 

 

real estate investment loans

 

 

Buying a Home on Land Contract

Buying a home on land contract (or seller financing) is a great option to go with if you don’t meet normal lending guidelines for traditional financing. It allows you to take ownership of a home without having to deal with banks (temporarily).

Also called “contract for deed” buying a home on land contract has many pros and cons. Below we dive into 7 major things to keep in mind when buying a home on land contract.

By reading this, and considering these factors, you’ll be able to determine if going this direction with your home purchase is the right fit for you and your family.

 

7 Things You Must Know When Buying a Home on Land Contract

land contract house

Condition of the Property

Many times, a seller is willing to sell on land contract because they know the home is in disrepair or has unique characteristics that won’t pass traditional lending standards.

Selling on land contract is an attractive route because the seller acts as the lender, so bank guidelines don’t matter at the time (because the seller is the bank essentially).

The issue is that most land contracts have a balloon payment on them. This means there is an expiration date on the contract that says the buyer needs to pay it in full within a certain number of years (usually 5 years or less).  At the time when the balloon payment is due, the buyer (you) will need to pay the remaining balance of the land contract. You would do that by either refinancing the home, or selling the home. Now you’re back at square one having to deal with any property condition issues that a lender may see as a problem.

So it is in your best interest to get an inspection prior to purchasing the home so you know full well what you’re getting yourself into. This way, you can address any property issues as soon as possible, and be ready to refinance.

Paper Trail of Payments land contract payments

Since a land contract is usually a temporary solution, it’s extremely important to keep a paper trail of everything. Most importantly, copies of checks of land contract payments.

When it is time to refinance out of the land contract, it is going to be important to show your lender evidence of land contract payments made (on time). Typically, you’ll need to show at least 12 months most recent payments, but you might as well keep the paper trail from day one to establish good habits and set yourself up for success for when it’s time to refinance out of the land contract.

Do not make your land contract payments in cash. Make it easy for the payments to be verifiable. The reason it’s so important to show verifiable payment history is because unlike a traditional mortgage, a seller financed loan is not reported on your credit report. This makes being able to show evidence of on time land contract payments crucial.

Terms of Contract

Buying a home on land contract allows for a certain amount of flexibility on terms, rate, and length of contract.

Anything is negotiable. But really, the seller is mostly in control because they are acting as the lender. Typical terms on a land contract are 15-30 year amortization with a 5 year balloon. This means the payment made every month is applied toward principal and interest. At the beginning, a large portion of the payment is applied toward interest, and very little goes toward the principal. As the months go by, more goes toward principal, and less toward interest. This is the best part of buying on land contract (instead of renting). Just like a traditional mortgage, you build equity in the home as the months/years go buy.

Not only do you accumulate equity naturally through market appreciation, but you also build equity by paying the balance down slightly every month. See how it works, download amortization schedule. Interest rates on land contracts vary, but are typically higher than traditional mortgage rates.

Fair Market Value home value land contract

When not having to deal with traditional lending guidelines, part of that means you don’t have to deal with low appraisal issues when buying a home on land contract.

This is both a good and bad thing.  Good, because you can still proceed with owning the home (even if it’s not worth what the land contract is calling the purchase price). Bad, because if the appraisal comes in low you’re essentially buying a home with negative equity, and hoping the value goes up in the near future.

On a lighter note, it might not be such a bad thing because homes sold on land contract are often in disrepair, so a low appraisal may be expected (knowing that you’re going to make the updates needed in order to help increase the value).

Keep in mind, just because you spend $20K on a new kitchen, that doesn’t mean the value of the home is going to increase by $20K. Every market is different. The amount you spend on updates doesn’t necessarily equate to amount of increase in home value.  Fair market value is based on sold prices of similar homes in the area that have similar amenities and condition.

Down Payment Expectations

It is not uncommon for a seller to expect 10-30% down payment on a land contract.

It’s extremely rare to see a land contract where the buyer put 5% down or less, but it does happen. Keep in mind that the seller is usually looking to sell the home in order to get proceeds of the sale to purchase a new home or to relocate. If there are very little down payment funds the seller won’t be able to accomplish their goals in many cases.

The idea of a land contract is to provide a win/win solution for a unique scenario. The buyer gets to own a home (even if they have unique income/credit circumstances), and the seller gets to sell their home even if there are some unique property circumstances. But if selling means they don’t get any funds up front, it may be a challenge to come to terms with the seller.

When to Refinance  land contract questions

Refinance out of the land contract as soon as you can.

Rates on land contracts are typically higher than traditional mortgage rates. Why stay in that loan longer than you have to? Make sure there are is not a pre-payment penalty on the land contract. A pre-payment penalty is when you are charged a fee for paying off the loan prior to a certain date. If the land contract has been in place for less than 12 months, the lender is going to treat it as a purchase.

Example: you buy a home on land contract in May, 2016 and seek to refinance out of it in December, 2016. Since you’re in the land contract less than 12 months, the new lender is going to treat the new loan as a purchase loan. The down side to that is you cannot use the new value of the home even if significant improvements have been made. The value will be the lesser of the purchase price or the appraised value. After you have been in the land contract 12 months, you can use the new/appraised value.

Recorded Land Contract vs. Non-Recorded

When it’s time to refinance, it’s very important to understand whether or not the land contract was recorded with the county when you purchased the home.

Typically, you’ll know by looking a recent real estate tax bill. If your name isn’t on the tax bill, that means you’re not the owner (in the eyes of the county), and the land contract wasn’t recorded. Don’t worry, it’s not the end of the world if the land contract wasn’t recorded. Conventional mortgage guidelines state that as long as the land contract was executed for 12 months or more, the new loan can be treated as a refinance.

However, if you’re seeking a government loan like an FHA loan, the land contract needs to be recorded for 12 months in order to treat it as a refinance. If you have been in the loan 12 or more months, and it wasn’t recorded, you won’t be able to “refinance” into an FHA loan, it’ll have to be treated as a purchase. The biggest issue with that is value (having to use the lesser of the purchase price on the land contract or the current fair market value). Simple solution: see if you qualify for conventional financing instead of FHA.

Conclusion

Buying a home with seller financing can be a fantastic temporary solution for temporary circumstances. If the intention is to live in the home long term it is crucial to do the appropriate research (above) in order to set yourself up for long-term home ownership success.

By the way, if you do have unique income or credit circumstances you may be a good candidate for a portfolio loan.

mortgage loan officerQuestions?

I invite you to reach out to me directly. With extensive experience in land contract refinancing, I should be able to help you with your land contract financing needs. [testimonials]

Looking forward to connecting with you soon!

 

 

real estate investment loans

 

How to Buy a House Without Lying to Your Mortgage Lender

How do you actually close on a house without trying to sneak something by the big bad lender?

For some reason there’s this skeleton in everybody’s closet that they don’t want the lender to find out about. They think that if the lender finds out everything is going to fall apart, and they’re right.

But, there are certain things that need to be talked about or resolved, before closing on a house. Here’s the thing, one thing you have to remember is that if there’s an issue, we are going to find out.
There’s no sweeping stuff under the rug.

The way that you buy a house without lying to your lender is by telling the truth from day one.

By doing that (being completely transparent about all of your financial circumstances) it gives the lender the opportunity to work on a solution. Otherwise what happens is the lender finds out some other way.

By waiting, and not telling your lender you set yourself up for failure.

The realtor is set up for failure.
We’re all set up to then be scrambling to try to find a solution the day before closing.

Then the stress level goes through the roof. “what’s going to happen? Am I going to be homeless?”

When really this stuff could have been resolved a month ago (most of the time), and then the stress level isn’t as high.

Let’s just put all the pieces of the puzzle together at the same time, at the beginning, as soon as possible. If you know that there are any issues let’s get it in and figure it out.

We’re all about solutions. Let’s figure it out.

Solutions.
Resolutions.
Resolve.
Opportunity. 🙂

I don’t see an issue as “end of the world”. I see an issue as “hey, we’re going to learn something now, we’re going to figure something out.”

So Your EX Destroyed Your Credit…

Portfolio Loan

Post-Divorce Mortgage

I have seen it countless times. An otherwise “A grade” borrower is left with no mortgage options because their ex-spouse was extremely irresponsible with their finances while going through divorce. Resulting many times in no other option than having to file for bankruptcy, and even foreclose on their home.

For these types of situations there is hope!

FHA, VA, and conventional guidelines are set in stone. As brutal as it sounds, they don’t really care about the sob story. If you had a nasty divorce which resulted in a bankruptcy, short-sale, or foreclosure you’re pretty much between a rock and a hard place if you have any desire to be a homeowner in the next couple years.

So what can you do? You have been a homeowner since you graduated college 15 years ago. Are you really going to be forced to live with family, or rent? NO. Believe it or not, there are lenders out there that take a common sense approach to mortgage loans for people with bad creditlending. Lenders that will look at your situation from a common sense standpoint, and make every effort to understand exactly what led to the circumstances that you’re in. Lenders that will take into consideration that you fell on hard times, but are now back on your feet. These are the lenders that offer in-house portfolio lending. Lending designed to bring common sense back into the home financing world. Where you don’t have to fit inside the little black and white boxes of the strict government guidelines.

Imagine that?  Being treated like a human being instead of a statistic. What a refreshing concept?

So where do you start? The best thing to do is seek out a small-to-mid-size lender, bank, or credit union which offers portfolio loan financing. Find out what their requirements are for these unique loans. Find out what you can do to prepare as best you can. There are still going to be requirements to meet because they want to make sure you ARE back on your feet, and confirm that you do have the ability to repay the loan.

thumb-422147_640Some things to prepare yourself for when getting a portfolio loan:

  1. You’ll probably be required to put at least 10% down.
  2. Points may be required to cover the level of risk they are taking.
  3. Typically there is no mortgage insurance requirement 🙂
  4. You need to have a verifiable income.

 

Other situations when a portfolio loan may be your best option: unique property you’re looking to buy, self-employed less than two years, bad credit because of an isolated incident like a work injury, etc.



You thought you didn’t have a chance in the world to buy a home, but don’t give up. If you’re back on your feet, and you have at least 10% for down payment, home-ownership may be more within reach than you thought.

portfolio mortgage lenders

 

I invite you to reach out to me directly to see if a portfolio loan is the right fit for you.

At the very least I should be able to point you in the right direction.

 

real estate investment loans

Repair your credit today with Lexington Law

Self-Employed Less Than Two Years Mortgage Solution

Update: 3/6/17

No conforming product currently allows for 1 year tax returns as self-employed if self-employed less than 2 years. On a vary rare basis, some lenders will allow for less than 2 years self-employment. 

It is unclear currently on if 2 year tax returns averaged will be acceptable. 

I will keep this updated as new information comes in. The updated guideline is below. -Adam Lesner

For self-employed Borrowers, the number of years of required tax returns will be based on the number of years the business has been in existence:

  • For businesses operating for five or more (5+) years, one (1) year of business and personal returns will be required.
  • For businesses operating for less than five (5) years, two (2) years of business and personal returns will be required.

(the solution may be a portfolio loan if you have extensive experience in same line of work prior to going self-employed and have at least 1 full year tax return as self-employed)

Is it possible to buy a home if you are a “private contractor” or have been self-employed less than 2 years?

The answer is yes it’s possible, but each situation is unique.

Before we dive into how it’s possible, let’s get on the same page of what the root issue is. Being self-employed less than two years makes it difficult for the lender to make a determination of what your actual income is because there is limited history. Since there is limited history, it’s just as difficult to determine the likelihood of that income to continue in the future.

“Okay, but Adam, I can show you my bank statements with deposits of $10,000/week.”

Right, I get it. You make good money. You have cash money sitting in your bank as a result of your business being profitable. The problem: the lender can’t see how much you had to spend in order to get that kind of return unless you have a profit and loss statement prepared, and show proof of how you’re reporting those expenses to Uncle Sam.  So many, maybe even 80% of the business owners that provide tax returns for me to look at, claim substantial write-offs which offset their income in a way that nearly puts them at a break-even point. The solution: get a bank statement mortgage. There are a few different options when it comes to using bank statements as proof of income. Ask me if I can help with your unique situation by using you bank statements as proof of income.

The good news…

person-110303_1280is that there are lenders out there that will take a look at self-employed borrowers, or even 1099 private contractors from a common sense standpoint. Standard loans backed by Fannie Mae, Freddie Mac, FHA, etc. are not going to be the way to go if you’re self-employed less than two years. The guidelines are strict, and the opportunity to be looked at from a common sense standpoint are extremely limited. Your best bet is to find a lender that offers portfolio financing. This is where they lend their own money, and keep your loan in-house. Keeping your loan in-house means it will not be sold on the secondary market, which means it will not have to meet the strict guidelines of conventional and FHA mortgages. You’ll find portfolio lending with the smaller lenders or credit unions in your local areas. They are the companies that are organically grown within the community, and they tend to have more of an attachment to the area.

2 examples that might make sense to get approved for home financing for less than two years self-employed borrowers:

  1. You have been an IT professional for 5 years. Last year you went from being a W-2 employee to a 1099 employee (private contractor). You’re still working for the same company, but now you are on an annual contract instead of an annual salary. You provide a profit and loss statement showing your income is consistent with how you claimed your tax returns last year. Bam! It makes sense right? Well, most lenders won’t talk to you unless you have 2 years tax returns.
  2. You have been in business for yourself for 5 years running a printer supply store. Last year you had to change the name of your company because of a shady partner that you had to break ties with. You still operate on the same premises. The only thing that changed is the name of your company. Some loan officers will say “Yeah, let’s do this,” just to find out a week before closing that their underwriter isn’t going to approve the loan because there is not a two year history of that business. But, come on, it’s common sense. You’re only going to be looked at from a common sense standpoint in a case like this if you’re working with a lender that offers portfolio loans.

An example that probably won’t fly:

  • You have been a plumber for 10 years. You decide to quit your job and open a pizza parlor. You decide 6 months into it that you want to buy your dream home on the lake. Sorry, it’s going to be impossible to make a determination of what your income is in that short period of time.

How do tax returns impact your mortgage approval? Here is my latest post on that.

 

 



When seeking a portfolio loan, keep these things in mind…check-37583_1280

These are loans that are funded in-house with your particular lender, taking risks the vast majority of lenders aren’t willing to take. You may be required to put 10% down or more. You may only be able to do this type of loan on a primary residence. Your rate might not be the same as what conventional rates are. You may get a chance to be told “Yup, you’re approved”, when everyone else is saying “no”!

I invite you to reach out to me.

portfolio mortgage lendersGet your questions answered. You will not be talking with an intern, or someone who just got their mortgage license. You’ll be talking with me directly.

We can’t help everyone, but we do make every effort to take a common sense approach to get self-employed borrowers approved if it makes sense.

pre approved home loan

 

6 Proven Ways to Close on Your Home Lightning Fast

“Dude, so do you think we could close next week?”
“Dude, no. You didn’t even send me your stuff yet.”

I know this might be a shocker for you, but lenders actually want to close your loan. In fact, if it doesn’t close then they have wasted countless hours and resources with nothing to show for. Just like Realtors. The thing is… we have to cover our ‘you-know-what’, and make sure the loan meets all the fun and amazing guidelines that have been put into place.

Here’s the kicker, there are ways to speed up the process and make EVERYONE look good. Want to know how? Awesome! you’ve come to the right place. 

First of all, let’s get one thing straight: It’s going to take about 30-40 days to get to the closing table. That doesn’t mean the clock starts ticking when you found the house on Zillow. That means once you have a fully executed purchase agreement, and you tell me the inspection came back with flying colors, then we get rolling and order the appraisal. Is there such thing as closing quicker than 30 days? Of course. And if you use these techniques below, I promise you’ll be setting yourself up for success.

  • Get your crap together. If your lender has given you a list of stuff that is needed, take an extra 5 minutes to make sure you’ve gotten everything requested. An extra 5 minutes of making sure you included all pages on tax returns and bank statements will save you a couple necessary trips to the fax machine, and possibly a week of being in process. Click here for the list that is detailed and fool-proof.
  • Order inspection as soon as you have an accepted offer. This should be your next phone call after getting the good news that the offer was accepted. Many times your Realtor or lender will have a recommendation as to who should complete the inspection. You want to make sure the home is in reasonable condition, but you don’t want to waste money on an appraisal if the inspection comes back with more than you’re willing to take on. So it’s important to get the inspection done ASAP so you can move onto the appraisal, and get rolling.
  • Be fricken honest. Don’t withhold information from your lender thinking that will reduce bumps in the road. I promise, it will only make things worse. If you communicate something that you think might be a problem, your loan officer will now can be proactively working on a solution for you. The last thing you want is for us to find out something last-minute, and scramble to meet the contract date.
  • Answer your phone. Or at least respond to emails/texts. I know this one seems obvious, but dropping the ball on communication can not happen. Everyone needs to be in the loop as much as possible to simplify the process and maximize efficiency.
  • Get your homeowners insurance in-line. I can’t tell you how many times “the last thing” we’re waiting on is a declarations page from the homeowners insurance company. Not because the company is slow, but because the borrower waited till 48 hours before closing to get a quote. Once you have the appraisal, give your insurance guy a call to put together a policy.
  • Stay in town. Or at least have the means to easily communicate while you’re gone. Buying a home is obviously a big commitment, which involves a lot of moving parts. If someone falls off the map, everything in the process can come to a screeching halt, causing major delays. But if you are leaving, give all parties a heads up, and double-check to see if there is anything that is needed from you.
I can tell you with absolute certainty, if you keep these things in mind when you’re buying a home things will go much smoother for you. 

 

There are so many factors that can create challenges to overcome. Some are fixable, some aren’t. If you let a little bit of your OCD side come out and play, it will work wonders in terms of detail and promptness.

What bumps in the road have you experienced recently that caused a seemingly unnecessary delay?

Loan Battle to the Death

Fight for the approval, if it'sI really hate to be the one to break it to you, but not every transaction is going to close. There are a lot of moving parts when it comes to final approval when buying a home. One small slip up can mean the difference between closing and being denied.

The good news:

Many of the tough scenarios can close with a little extra effort.

So many times there is too much emphasis on what the PROBLEM is, and not enough discussion on what the number of solutions may be.

I have seen so many people with their guard up. Loan officers, Realtors, clients, appraisers, etc. It seem like many folks have their guard up, defending “their” position.

The question is: Why not try a different approach?

We all have the same purpose, all looking toward the same end result. CLOSE.

Working together, to fight for that closing will help all parties accomplish that goal.

Remember to put your guard down, don’t fight the person you’re communicating with. However, do fight for that approval if it’s worth fighting for. Watch video below: