11. What is a "seller contribution?"

A sale agreement typically includes both a purchase price for the property as well as terms and conditions. It sometimes happens that a buyer will make an offer subject to certain terms I'll buy your house but I want to keep the washer and dryer or whatever.

One possible condition concerns "seller contributions." For example, I'll buy your house if you will pay the first $x of my closing costs. Lenders will generally accept seller contributions as part of a transaction providing they are written into the sale agreement, fully disclosed and only represent a limited fraction of the sale price. Different loan programs have different contribution caps. Lenders and brokers can provide specific advice.

A seller contribution can be a useful bargaining chip in slow markets - buy my house and you can have a credit of $x at closing. It's a thought that goes a long way with cash-strapped buyers.

12. Can I rent out a room to help me qualify for a loan?

Generally no. Lenders have no assurance that such income will be regular and continuing.

13. Can we use private financing to buy real estate?

In theory, yes. In practice, not really. The odds against private financing are substantial. In 1997, according to the NATIONAL ASSOCIATION OF REALTORS®, 74% of all first-time buyers obtained financing from mortgage companies, 19 percent from commercial banks, 1% from S&Ls, 1% from "other" sources, 1% from credit unions, and 1% from private investors.

14. We have stock that has significant value and we think its price will increase. How can we come up with a down payment without selling our shares?

This is an increasingly-common, and delightful, problem. A home purchase typically requires either a sizable down payment, say 20%, or some form of backing by a third-party, perhaps the FHA, VA, or a private mortgage insurance (PMI) company to buy with less down. With a third-party, loans with 15, 10, 5, 3 and even nothing down are possible. So, one choice is to look for financing with as little down as possible. A second choice is to look at RAM financing - a reserve account mortgage.

With a RAM loan you might get 100% financing. At the same time, you would deposit an asset with the lender, say the stock you do not want to sell. The lender then holds onto the stock until the property has a certain level of equity caused loan amortization (reducing the size of the loan through payments) and, hopefully, increasing property values. The borrower has 100% financing.

RAM financing raises important questions: Who gets the interest on the account? What if the value of the securities declines? How is the new value for the property determined? What is the monthly payment? Is all interest deductible? Mortgage lenders and securities brokers can provide additional information.

15. What is "MCC" financing?

Because states have better credit than people, they can borrow money at low rates. Under Mortgage Credit Certificate (MCC) programs, a state lends money to first-time buyers and low-income buyers (usually) at below-market rates (but at rates that cover the interest cost of floating bond issues) and with little down (say 1% to 5%).

MCC’s allow you to borrow money and to then write off a portion of the interest, up to 20%, as a tax credit. The remaining interest deduction is just a write off.

For example, suppose your interest cost for a year is $5,000 and that 20% can be used as a tax credit. On your federal taxes, you would deduct $4,000 as an itemized expense, and you would deduct $1,000 (20% of $5,000) from your tax bill. See a tax pro for details.

Speak with local lenders to see if MCC financing is now available - because funding is limited these programs often run out of money quickly.

16. How quickly must I apply for a loan?

Many sale agreements require buyers to apply for a mortgage within a specific time period, say 7 days after the contract is signed. This is a negotiable item, however, and can be any period agreeable to both parties.

This is an important matter because if an application is not made, then a buyer may be in violation the sale agreement. A violation of the sale agreement, in turn, could be grounds to forfeit the deposit. Thus, buyers should go through the sale agreement with great care before signing to assure that all obligations are known and understood. Work with an appropriate professional such as a buyer broker when reviewing a sale agreement.

When you meet with a lender, be certain to obtain a letter stating that you met and showing when. Immediately provide this letter to the seller's broker in the manner required by the sale agreement.

17. Can I buy a house with an award from a lawsuit?

Sure - if the money is there. But, until the matter is finally resolved, appeals run out, and a check is cashed, how does anyone know that there will be money available for a realty purchase?

What if someone contracts to buy a home today with $20,000 in cash due at closing in 60 days money to generated from the settlement of a suit. And what happens if the suit is delayed? Money at closing is still required and if the buyer does not close there could be substantial damages - and maybe another suit....

18. I am getting married in two months. I have lousy credit, but my spouse-to-be has excellent credit. Can a home be bought by my future spouse individually?

Yes. However, he or she can only borrow on the basis of one income and his or her credit standing. Together you might have far more income. Lenders, incidentally, will probably want both parties on the property title even if you are not on the mortgage this removes a barrier should foreclosure be required.

19. What rules prohibit discrimination in real estate sales and financing?

The Fair Housing Act is the major legislation prohibiting discrimination in real estate it provides that there can be no offer to sell, rent, buy, or exchange property that contains any preference, limitation, or discrimination based on race, color, religion, sex, national origin, handicap, or familial status, or an intention to make such preference, limitation or discrimination.

This federal law applies to the sale and rental of housing, residential lots, advertising the sale or rental of housing, real estate financing, the provision of realty services, and the appraisal of real property. It also prohibits the practice of "blockbusting."

Other federal laws that offer protection include:

The Civil Rights Act of 1866

The Civil Rights Act of 1968

The Americans with Disabilities Act

The Equal Credit Opportunity Act

State and local laws may also identify additional discriminatory factors that are prohibited.

Brokers, lenders, and attorneys can explain such matters in detail.

20. If the appraised value and the sale price of a home are different, what will lenders use when granting a mortgage?

Whatever is lower.

Lenders want as little risk as possible, so they will look at both the sale price and the appraised value and then make a loan based on the lower of the two numbers.

21. What is "buyer's remorse?"

With some frequency it happens that buyers often have a sense of remorse after contracting to buy a home. Why?

A home is a very large purchase. Not just in terms of dollars, but also in the sense of status, ego, and commitment. And because it is such a transforming event, it naturally and reasonably causes some concern.

But, not to worry. Buyer's remorse typically passes in quick order.

22. Can I buy a house after a bankruptcy?

Probably. There are two issues to consider.

First, lenders like to see two years of good credit after a bankruptcy is resolved. However, there are instances where lenders will finance with a year of good credit.

Second, lenders want to know why you have gone bankrupt. There is a substantial difference between a bankruptcy that is caused by reckless financial habits and simple financial disasters a car wreck, medical costs, the plant closed after 30 years, the town was underwater for three weeks, etc. In other words, not every bankruptcy is a by-product of financial negligence.

23. What is a "stigmatized" property?

There are properties that are in flawless physical condition but may nevertheless present unusual marketing issues. For instance, homes that have been the site of murders, suicides, or that are reportedly inhabited by ghosts are known as "stigmatized" properties. This is a home with a condition that is psychological in nature rather than a matter of bricks and mortar.

The subject of stigmatized houses is complex. While some people may want a house with a ghost, others do not. The subject gets tangled even further when one is asked whether murders and suicides at a property must be disclosed.

The rules on this matter vary by state some say a given condition must be disclosed, others say "no," some say disclosure is not necessary after so many years, and some states say nothing one way or the other. For specifics, please speak with a broker or real estate attorney in your community.

24. What is the difference between a co-op and a condo?

In general terms: A co-op is a corporation that owns real estate. If you belong to a co-op, you own stock in the corporation and the exclusive right to a given unit. There is usually an underlying mortgage on the property and your co-op fee includes some or all mortgage payments as well as other costs.

With a condo, you own real estate and you have access to certain common facilities. The condo is typically responsible for exterior maintenance and you pay a monthly condo fee. You have your own title and mortgage, so mortgage costs are not part of the condo fee.

25. What are some of the basic questions to ask when looking at a co-op?

Co-op ownership raises a number of issues that should be of concern:

1. What is the value per unit of the underlying mortgage?

2. What is the voting scheme - one vote per unit or voting based on unit size.

3. Is there a reserve fund for repairs? If so, is it adequate?

4. Are major repairs anticipated in the next two years? If so, how will they be funded?

5. Is the co-op now facing or likely to face a lawsuit for any reason? If yes, what are the possible damages?

6. What pricing trends are associated with the co-op? Are prices rising? Falling? Can you review all sales for the past year?

7. Is a property tax rise known or expected?

 

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