Mortgage and Portfolio Loan Guide

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

 

5 Reasons Your Home Appraisal Matters

If you have gotten to the point in the home buying process where an appraisal has been ordered, you’re now moving forward full steam ahead.

Pre-approved. Check.

Found the house. Check.non-warrantable condo

Offer accepted. Check.

Inspection passed with flying colors. Check.

Condo meets requirements. Check.

Time to order appraisal.

Congratulations!

It’s no secret that when buying a home an appraisal plays a significant role in completing the process successfully.

For the most part, the biggest anxiety for all parties is “did the home appraise for the contract price?” While the value is indeed extremely important, there is more that an appraisal brings to the table.

The truth is there are several crucial ways that an appraisal contributes to the approval process other than a highly detailed opinion of fair market value of the property.

Let’s look at those truths with a bit of detail and perhaps provide some clarity to the impact an appraisal has on the home buying process.

5 Reasons Your Real Estate Appraisal Matters

mortgage homeTiming

Getting an appraisal back within a reasonable time frame can make or break a deal. If you’re in a rural area or in an area where the real estate market is booming, you could wait up to 3 weeks or more just to get the appraisal results. This can be even more frustrating if the appraised value comes in low or repairs are needed.

Right now there are even some areas in the country where appraisers are flat out declining appraisal orders because they know they do not have the capacity to turn the appraisal report around in a timely manner.

When the purchase contract states that the deal needs to close within 45 days, and it takes 40 days to get appraisal results, expect an extension to the purchase agreement.

2-real-estate-appraisalCondition

If you’re getting a mortgage, the property needs to meet some basic standards for the lender to give the thumbs up on acceptable property condition.

Common property condition issues that pop up on appraisals and cause issues: mold in the attic or basement, peeling paint on the outside of the home or garage, trip hazards, broken windows, and missing fixtures.

Anything noticeably wrong with the property is likely to be pointed out on the appraisal report including photos. When there are repairs noted on the appraisal the seller will need to complete those repairs prior to closing, and the property needs to be reinspected by the same appraiser to confirm the requested repairs have been made.

home mortgageComparables

When coming up with an opinion of value, the appraiser selects recently sold homes within the market that are similar in size/condition/location/amenities.

The appraiser then compares those homes with the subject property and makes adjustments based on differences and similarities between the homes.

For example: if the subject property is a 3 bed, 2 bath ranch on .5 acre, the appraiser would look to include 3 bed, 2 bath ranches that sit on a .5 acre lot. The appraiser would not be including a 3 bed, 2 bath condominium.

It doesn’t have to be identical and size and condition, but it does need to be the same property type. Unique properties can be very difficult to finance. If there are no similar properties sold within a reasonable distance and time frame (underwriter discretion) the deal could be dead. There is also a limit to how much an appraiser can make adjustments on value based on the differences in homes.

If the adjustments made are too high, the comparable property used could be considered irrelevant or unacceptable and would need to be replaced by a better comparable if possible.

home mortgageConfidence

For some buyers the appraised value can have an impact on their ego.

Let’s say you get under contract on a house for $300,000 and it appraises for $380,000. There might be an increased warm and fuzzy feeling knowing you got a good deal. Another confidence booster in a case like this is that if you’re going to be paying private mortgage insurance (PMI) due to a low down payment, you may be able to refinance in a year and then use the new appraised value to drop your PMI (which could save you hundreds of dollars a month).

Knowing that you have instant equity in the home that you already loved to begin with can really add a nice cherry on top.

house home loanCompliance

The collateral (the house) used to secure the mortgage must comply with lender guidelines.

One of the biggest issues when talking about compliance has to do with finding out if the home is a non-warrantable condo (does not apply to single family homes). If the property is a condominium the appraiser will reveal information pertaining to the number of units that are owned by 1 entity, number of units that are not complete, and other important information about the condo that could cause issues. [more on non-warrantable condos here]

Another fairly common issue that can come up as a compliance issue is number of acres the property sits on. Depending on what type of loan program you’re seeking, there may be an issue with giving any value to acreage beyond 10-20 acres. For someone buying a 50 acre property, this can be a deal breaker if most of the value is in the land.

If the appraisal states subject property was recently was sold, there could also be flipping restrictions depending on what type of loan you’re seeking.

The appraisal can clearly make or break the deal in several unique ways other than home value.

mortgage loan officerIf you have run into an appraisal issue that you seem to not be able to get around, you may want to consider looking into getting a portfolio loan. Portfolio loans are mortgages designed to help with unique property scenarios. Portfolio loans are also a great option if there are unique income or credit circumstances. More on portfolio loans here.

In addition, if you have run into a challenge on obtaining a mortgage that you can’t seem to get around, I invite you to reach out to me for a possible solution. If I cannot help, I should be able to point you in the right direction at the very least.

 

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.”

What is a Blanket Loan?

A blanket loan gives the opportunity for a growing real estate investor to bulk finance their portfolio. These investment property loans can be done on the purchase of new rentals, and refinance of existing property.

Great, but why would an investor want to have all or some of their rental properties wrapped up into one mortgage?

What is the advantage?

In case you have been living under a rock since the crash in 2007, I’ll fill you in a bit on what’s it’s like to finance a rental property the old fashion way. (Don’t get me wrong, I love what I do, but the government regulation involved can be a bit daunting sometimes.)

When looking at getting investment property loans in the mainstream mortgage market, here are some challenges that are often faced:

  • Personal income issues
  • Personal credit issues
  • Number of financed properties
  • Property type restrictions
  • Property condition issues
  • The list goes on

What it boils down to is that the mortgage world is extremely regulated. From having to re-disclose a loan package within a certain number of days every time a loan officer sneezes, to having to get a letter of explanation for nearly every life event in the most previous two years. Okay, that might be a bit of an exaggeration. But the point is, getting a regular mortgage is not as simple as it once was.

So imagine getting 5, 10, 15 loans individually within a 3-6 month period. That means your entire portfolio is re-reviewed each time, possibly by a different underwriter.

Yeah, no thanks.

For bulk scenarios like this, a blanket loan is probably the best option in terms of sanity and simplicity.

Sanity; because it’s all done in one approval process.

Simplicity; because the approval is based on property cash flow and equity, NOT personal income and credit (although good credit is always helpful when being considered).

This is a commercial loan, so the property performance is evaluated more heavily than the investor’s personal situation.investment property loans

Typical requirements on a blanket loan.

  • At least 5 properties included in the loan.
  • Minimum loan amount is usually 300K.
  • Rental income must cover payment as well as other expenses like taxes, insurance, association dues, etc. Up to 20% vacancy factor may be applied.
  • Units must be 90% occupied.
  • No vacation rentals. Minimum leases need to be at least 6 months in length.
  • Close in an LLC.
  • Must have at least 2 years property management experience.

Of course, there are more guidelines in order to qualify. Every deal is evaluated individually, this is meant to give a brief snapshot of what to expect.

Typical structure of a blanket mortgage.

  • Maximum 75% loan-to-value.
  • Can be done on purchase, rate and term refinance, and cash-out refinance.
  • Typically done on 5 or 10 year balloon (amortized over 30 years).
  • 30 year fixed available in some cases.

How to apply for a blanket loan?

You can start by filling out this rent roll. By completing it in full you’re really able to provide a full picture for the potential deal to be evaluated and priced out. Depending on the complexity of the scenario it can take 48 hours to a week to get a response on if it can be done and what the terms might look like.

At that point, you can review the blanket structure and decide if this type of loan meets your needs.

What are some alternatives to bulk financing?

  1. Full doc loan. This is where your income/credit/assets are evaluated in full. This can be done on a case-by-case basis up to 10 properties financed (down payment and pricing varies after 4 properties are financed). The concern with going this route is that the properties you are potentially buying or refinancing might recently bought/renovated/flipped. When dealing with flips, it can be tricky to get an acceptable value (example: it was bought 3 months ago for 20K, renovated, and now is being sold for 110K). That’s an extreme example, but the point is that it can be a challenge to have acceptable value on collateral if the price isn’t justified in detail. Yes, that can be a challenge in any scenario, but when you’re doing a full doc loan it can be even more of a hurdle.When looking at these opportunities, be sure to get info on when the properties were purchased. If they were originally purchased at heavy discount within the last 12 months then it would be good to know exactly what renovations were made so that value can be justified.
  2. Individual Investor Cash Flow Loan. These loans are designed to cater to investors who would prefer a more simplified approach when it comes to approval. Credit is pulled, we do verify assets, but we do not get docs on your personal income (no tax returns, no paystubs, etc). The deal is evaluated on the cash flow of the property and equity. We can go up to 80% LTV on these (on a 15 year fixed), or up to 75% LTV (on a 7/1 ARM or 5/1 ARM). The 15 year fixed is a nice option, but it can have an impact on the cash flow, so it doesn’t always work out when structuring it on a 15 year.With this type of loan there is no max number of financed properties.For cash flow we take into consideration the current lease on the property (if applicable), and we get a 1007 rent schedule completed by the appraiser to tell us what the fair market rent is. From there we factor in mortgage payment, taxes, insurance, and homeowners association dues (if applicable). If the fair market rent covers those items and other annual expenses when applicable, we’re good (minus 20% vacancy factor). [more on this here]Keep in mind that there are typically reserve requirements in most cases. “Reserves” as in liquid assets left available after down payment, costs, escrows are paid at closing. Typically you’ll need 6-12 months reserves for the subject property. Example: the payment on the subject property is 950/month, you’ll likely need 11,400 in reserves. In some cases, in addition to the reserve requirement on the subject property, you’ll need an additional 2 months reserves for all other financed properties. I think it’s imperative to communicate this because the reserve piece is often ignored by many investors. You obviously don’t want to overextend yourself when making a purchase, and disregard the need for reserves. When that happens, things tend to fall apart.
  3. Pay cash. Liquidate your assets and run the show. Even well healed investors don’t typically pay cash unless they have to because, as they say, cash is king. When you use up a substantial percentage of your funds to acquire a property, the pressure tends to be more stressful.
  4. Hard Money Loan. These are great options if the property is in serious disrepair or if you need access to capital quickly. The luxury of speed typically comes with an aggressive price up front and monthly.

There are a number of ways to acquire more real estate and grow your portfolio. A blanket loan is just another tool in the box to help accomplish your goals.

They aren’t for everyone, but a blanket mortgage does prove to be a valuable resource for many growing real estate investors.

I invite you to reach out.

portfolio mortgage lendersIf you’re an investor, or you work with real estate investors, feel free to reach out to me directly to get your questions answered.

If I’m unable to help, I can most likely point you in the right direction at the very least. All the best!

 

investment property loans


Best Investment Property Loans

Let me be clear. When I say that these investment property loans (portfolio loans) are ridiculous, I don’t mean that in a negative way. I say it from a ridiculously awesome standpoint.

Simply put, the residential mortgage guidelines have made things a bit difficult for real estate investors to grow their portfolio. But it doesn’t have to be that way anymore…

The Problemmortgage for rental property

When real estate investors are looking for a mortgage for rental property, and they already have several mortgages on investment properties, conventional guidelines say they cannot finance more homes for investment purposes.

Some lenders will allow up to 10 financed properties.

Some lenders will allow up to 20 financed properties (rare).

Most of the time, that’s only allowed if the home that you’re looking to buy is going to be your primary residence. So most investors with a portfolio of financed real estate are kind of stuck if they want to acquire more property.

The Solution

Real Estate Investment Loans, also commonly known as a portfolio loan.

These loans are designed to cater to the real estate investor who would rather not liquidate their reserves to purchase more real estate. This is specifically, a perfect mortgage for rental property.

5 Reasons the new Investment Property Loans are a Life Changer

  1. No income is reported on the loan application. The borrower is not qualified based on their employment. Think about it, if you’re buying a rental property, would you be making the payments on that loan from earned income? Heck no. The tenant will be making the payment for you. That’s why you got into the real estate investing business to begin with. To get into an appreciating asset that pays for itself. It makes sense to approve an investment property loan based on the cash flow of the property. (see below for how the expected property cash flow is determined)
  2. No maximum number of financed properties. This one is huge. Why? Because so many real estate investors tend to hit a road block when they hit 10 financed properties. Most think that at that point, their only option is to get a hard money loan (super high rate, very short term, paying several points). The good news is that Investment Property Loans (portfolio loans) are available, and common sense approvals exist.
  3. Not nearly as many insane government guidelines. These rental property mortgages are not treated like normal residential mortgages which are (what some would call) over-regulated. Why? Because these homes are being purchased for business purposes, and are treated more like how commercial loans are treated (approving the scenario based on potential cash flow and equity instead of borrower employment status). Why does this matter? Well, if you are reading this, I’m going to go ahead and assume you’re aware of the extremely strict guidelines in place that prevent many good people from buying a home because of a simple technicality. Bottom line, government regulation involving home ownership has gotten tough, with investment property loans it’s not quite as bad.
  4. Not necessary to put half down. This is another reason its a great time to get a mortgage for rental property if you have a high number of investment properties already financed. You DON’T have to put 40-50% down to make it work. In many cases 25% down is acceptable. Obviously credit score and loan size will have an impact on required amount down. [Just ask me, I’ll let you know]
  5. Not necessary to have perfect credit. Let’s face it, life happens. Unforeseen tragedies happen that result in painful credit repercussions. You shouldn’t have to wait 7 years in order to be able to get back into the real estate investing world. In many cases these are doable if at least 2 years have passed since a major credit issue (bankruptcy, foreclosure, short-sale). It wouldn’t be a bad idea to be at least 660 credit before applying. If you’re not at 660 credit score yet, here is a great free tool to help yourself out when it comes to improving your credit score.

 


A loan app without income? Is this the wild west?

Circling back to the comment above about no income being disclosed on the loan application.

No. We’re not getting back to the old days when anyone with a pulse is approved for a mortgage. These loans are fully underwritten and evaluated for ability to repay the loan.

But the ability for the loan to be paid lies within the monthly liability (mortgage payment/taxes/insurance/association dues) in relation to the fair market rent.

So how is fair market rent evaluated?

Pretty simple really. If you’re purchasing an investment property, the appraiser will do a standard 1007 rent schedule (or something similar) to calculate fair market rent for the lender. The lender will then take a percentage off of that amount (to account for possible vacancies).

If you already own the property, and are refinancing, the current lease will be evaluated as well as a 1007 rent schedule to be completed by appraiser.

A Huge Win for Non-Warrantable Condos

Investors who have been looking to buy non-warrantable condos have been having a tough time. They usually have to buy the property cash, or get a hard money loan. With investment property loans that’s probably not going to be necessary if the association is established and the phase is complete.investment property loans

A big problem with investing in condos right now is that the complex can be deemed “non-warrantable” due to a number of circumstances. [more about non-warrantable condos here]

Most of the time condos are labeled non-warrantable because the percentage of units owned for rental purposes is higher than what’s usually acceptable. This is when getting a mortgage for rental property is a great tool to have. The complex will be evaluated and a common sense decision will be made.

The complexes aren’t always approved, but it’s a great opportunity to explore if you’re and investor running into the non-warrantable condo issue.

Experience is Requiredrefinance rental property

As I mentioned previously, these real estate investment loans are designed for folks who have been investing for a number of years.

Perfect for investors who are running into issues with hitting maximum number of financed properties.

Be prepared to provide legitimate evidence that you have been a real estate investor for at least 2 years. The ability to repay the loan is tied to your ability to manage the property effectively.

If you are fairly new to real estate investing, it will probably be best to get a normal conventional loan.

I invite you to reach out.

portfolio mortgage lendersIf you are looking for a solution to your investment property loan challenges I encourage you to reach out to me to see I might have the right fit for you.

You will not be redirected to some intern in a call center. You will connect with me directly. [who I am]

If for some reason I am unable to assist, I will most likely be able to point you in the right direction at the very least.

real estate investment loans



What is a Non-Warrantable Condo?

Finding out that the condo you’re looking to buy is considered to be a non-warrantable condo can be heartbreaking.

When a condo is identified as a non-warrantable that means it does not meet conventional guidelines (meaning Fannie Mae and Freddie Mac won’t buy the loan).

This is kind of a big deal because Fannie Mae and Freddie Mac pretty much buy all conventional loans. If they won’t give the thumbs up on the condo, you and the seller are in a bit of a tough position.

The first thought that comes to mind for most people is “okay, well what about FHA, VA, or Rural Development? Why don’t we just do a government loan?”

Great question.portfolio mortgage lenders

For the condo to be eligible for FHA financing, it has to be on the FHA approved condo list. If it’s not already on the list, it’s probably best you move onto something else because getting a condo on the FHA approved condo list isn’t exactly a walk in the park.

Same thing goes for getting a condo with a VA loan.

The department of Veteran Affairs actually has their own list of approved condos. Again, not the easiest thing in the world to get on that list.

For a Rural Development loan, the condo just needs to meet the conventional condo guidelines to be eligible for financing. There is no USDA Rural Development condo approved list.

Chances are, if the condo doesn’t meet conventional guidelines, it probably doesn’t meet government guidelines either.

What makes a condo non-warrantable?

Some companies will have their own overlays as to what is considered acceptable, but we’ll look at some of the most common reasons for a condo to get flagged as non-warrantable:

  • Projects where a single entity owns more than 10% of the total units (for projects with 21 or more units).
  • Project has inadequate insurance coverage.
  • Condo project has similar characteristics and is managed as a hotel (condotel)
  • Project (HOA, sponsor, developer) is in litigation that relates to safety, structural soundness, functional use or habitability of the project.
  • New construction condos.
  • Established condos that have additional phases in need of completion.
  • High percentage of non-owner occupied units.
  • High number of units being delinquent on association dues for more than 60 days.
  • Project budget is not appropriately structured.
  • And many more.

The most frustrating thing about buying a non-warrantable condo…

Many lenders wait until the last-minute before ordering a condo questionnaire (which tells them if the condo is warrantable orportfolio loans not).

Why?

Well, your guess is as good as mine. Maybe it’s their “policy” to get the condo questionnaire at the final stages of the loan approval process. Maybe the loan officer didn’t realize how detrimental a non-warrantable condo can be to the process.

It would seem that the most logical thing to do would be to get the condo questionnaire completed before even ordering the appraisal! Think about it, a condo questionnaire costs about $150 (sometimes free), and an appraisal costs $400 – $500. Wouldn’t it make sense to order the questionnaire first, to see if the home can even be financed to begin with?

But many times the opposite happens. Borrowers get under contract on a home, get appraisal done, get fully approved though underwriting, take selfie’s of themselves in front of their new home a week before closing, and then get a call an hour later from their loan officer who say’s “hey man, I just heard from Freddie Mac, they said your condo is non-warrantable”.

Really?

The loan officer is going to place the blame on Freddie Mac?

I know it seems insane. I agree. But there is hope…

How to buy a Non-Warrantable Condo

There are 3 ways to buy a condo that is not warrantable:

  1. Buy the condo with cash. Yeah, because so many people have hundreds of thousands of dollars lying around.
  2. Buy the condo on land contract. This is where the seller acts as the lender. This is a good option, but the problem is that there aren’t a ton of sellers willing to do this. Buying on land contract really limits you to what you can buy. Also, land contract holders usually want to be paid in full within 5 years.
  3. Buy the condo with a portfolio loan. You can find portfolio loans with small banks or credit unions. These are what some would call “common sense” loans. Portfolio loans provide the opportunity  for borrowers (and condo projects) to get looked at from a common sense standpoint.

Often times portfolio loans are a breath of fresh air for folks who have been denied for traditional financing. It gives them an opportunity to own the home they want if the big picture makes sense.non-warrantable condo

Portfolio loans are not “no-documentation” loans.

All income has to be verified. All assets have to be verified. An appraisal has to be done. All components of the approval process have to be legitimate. The main difference between the portfolio loan approval process and the traditional loan approval process is the chance to get the whole story looked at.

Portfolio lenders do not take a check-in-the-box type of approach unlike the traditional lending process. They/we truly look at all of the circumstances when making a decision.

These loans are kept on the lender’s portfolio, and are not sold on the secondary market like most loans.

The pricing on portfolio loans vary based on risk. And every portfolio lender has their own take on what each type of risk costs.

You’ll typically find that rates on portfolio loans are reasonable when considering the alternative (renting).

If you have been told you’re stuck because of a non-warrantable condo…

portfolio mortgage lendersI invite you to reach out to me.

You won’t be talking with some new loan officer, or a customer service rep, you’ll be connecting with me directly.

I get calls and emails almost every day from people around the US that are in need of financing for unique scenarios. If I am unable to assist, I should be able to point you in the right direction at the very least.

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Adam Lesner | NMLS 198818 | Troy, Michigan

Peoples Bank & Trust Co | Michigan, Massachusetts, and Florida. Also offering financing in most states across the US including (but not limited to) Georgia, North Carolina, South Carolina, Alabama, Arizona, California, Colorado, Delaware, Washington DC, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Ohio, Oklahoma, Oregon, Tennessee, Virginia, Wisconsin.

What is a Land Contract?

A land contract (or contract for deed) is

a popular way to purchase or sell a home without having to deal with banks or lenders. This is an attractive route to take if the property that is being sold is unique, or if the buyer of the home cannot get approved for a mortgage for one reason or another.

buying a house on land contractWhen selling a home on land contract the seller acts as the private lender. The buyer provides down payment and makes monthly installment payments to the seller for an agreed upon period of time at an agreed upon interest rate. Usually land contracts are done on a 3 – 5 year balloon. Meaning the borrower makes mortgage payments on a 15 – 30 year loan structure, but in 3 – 5 years the existing balance needs to be paid in full (home is sold or refinanced with a bank at that time).

It’s a good idea to have the land contract recorded with the county in order to have a paper trail and make it official. Many times the seller won’t be willing to sign over the deed until the land contract is fully exercised. This means that the buyer doesn’t technically take full ownership of the property until all payments are made on the land contract.

Advantages of Selling on Land Contract

Imagine you’re trying to sell your home. You have several offers, and one is finally accepted. The inspection is done and shows that there are some significant issues with the property. It’s agreed that the degree of the issues are so serious that a lender would never approve the loan because the appraiser would certainly have a laundry list of expensive items to be repaired before closing.

The good news is that they buyer is an experienced builder and could do most of the repairs himself. land contract winningThis is the perfect opportunity for a land contract option to be explored! The seller still gets to sell his home, and the buyer still gets to buy.

In addition to being able to accept a large down payment up front (usually 20% – 30%, selling on land contract also provides an opportunity for the seller to receive a steady flow of income. This would be for the duration of the land contract, and earning interest all the while.

Advantages of Buying a Home on Land Contract

With lending guidelines being pretty strict, it can be tough to get a mortgage if you have had credit issues recently, or have a unique income situation. A land contract may be your only option if you’re looking to buy in some cases.

This is great because it still gives you the opportunity to own your home! You can do upgrades, have pets, and live theland contract thumbs up American dream. It’s your house. Just make sure the county knows that. Get the land contract recorded when you buy.

The other advantage is that you get an opportunity to re-establish your credit. Making your land contract payments on time month after month will set you up for success when it’s time to refinance out of your land contract. Since the land contract holder will not be reporting your monthly payments to the credit bureaus (like a normal mortgage) you want to keep strict records of your payments. When it’s time to refinance the new lender will want to see a history of those payments to ensure you were on time, and consistent. If there were any late or missed payments your approval on your new loan is likely to be impacted.

Lastly, a land contract is great if you are a new business owner. Many times lenders will want to see 2 year’s tax returns before lending to self-employed borrowers. See here for an exception to that.

Refinancing out of Land Contract

As mentioned above most land contracts are done on a short-term, with the full balance being due at the end of the term. While you’re in the home you want to do everything you can to prepare for that. Think about the reason you bought on land contract… work on that.

refinancing out of land contractWhether there were credit issues, income issues, or property issues. Get squared away. The last thing you want to do it spend 5 years making payments on a land contract and find out that you can’t refinance because of how you filed your tax returns. Or maybe the property still needed a new roof and now the appraiser still won’t approve it on your new loan.

You don’t want to be in a position where you can’t pay the remaining balance on the land contract. The land contract holder is likely to take the property back if the terms of the contract allow. There may be negotiating room in the balloon depending on the individual. But do yourself a favor, and don’t make it come down to that. Get your ducks in a row, and be ready to refinance out of the land contract when it’s time.

Rates on land contracts tend to be a bit higher than what you’d typically see on a mortgage. If the land contract allows you to refinance before the balloon without pre-payment penalty, take advantage of that. As soon as you’re in the right financial position do what’s best for you. There is no need to stay in financing terms that are not appropriate for your situation.

An Alternative to Land Contract | Portfolio Loan

So often people think that if there is a unique borrower scenario, or a unique property scenario, a land contract is their only option. That’s true in some cases, but NOT all cases. If the situation is unique, a portfolio loan with a local lender or credit union may be your saving grace. These loans are funded with your local credit union or small bank, and is not sold on the portfolio loan great alternative to land contractsecondary market.

It stays in-house. So the lender is able to take more of a common sense approach than any other loan available.

Portfolio loans are designed to serve clients who fell on hard times, but are now back on their feet. Portfolio loans are also a great option for unique properties like non-warrantable condos, or homes zoned in commercial areas.

I invite you to reach out to me.

portfolio mortgage lendersIf you are looking to refinance out of your land contract, or you want an alternative to buying on land contract,  reach out to me directly.

I talk to folks all over the country every single day who are relieved to find out that portfolio loans exist, and are often a fantastic alternative to buying on land contract. I have closed many portfolio loans for people who thought that a land contract was their only option.

We truly do our best to take a common sense approach to get you approved. If I cannot help, I will do my best to connect you with the right lender to meet your home ownership goals.

So give it a shot. At the very least, you’ll walk away with a plan to set you up for success.

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What unique scenario have you seen where a land contract was the perfect solution?

Adam Lesner | NMLS 198818 | Troy, Michigan

Peoples Bank & Trust Co | Michigan, Massachusetts, and Florida. Also offering financing in most states across the US including (but not limited to) Georgia, North Carolina, South Carolina, Alabama, Arizona, California, Colorado, Delaware, Washington DC, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Ohio, Oklahoma, Oregon, Tennessee, Virginia, Wisconsin.