I am choosing to exercise a woman’s prerogative here and changing my mind. Instead of concluding the series on “Giving Your Underwriter a Naked Picture” (more professionally known as The Mortgage Insider’s Guide: 5 Tricks To Get Your Mortgage Approved), this article will continue on and next examine your property.
JRR Tolkien may have said, “His house was perfect, whether you liked food, or sleep, or work, or story-telling, or singing or just sitting and thinking, best, or a pleasant mixture of the all.” But that may not mean you can get a mortgage to buy it.
When I switched careers from education to mortgage lending, I had no clue what I was doing (some debate the use of past tense here, brats.) My VERY first client told me she was buying a single family dwelling and wanted to put just 5% down. Okay! We have ignition … we are good to go! NOT. Her definition of a single family dwelling was a condominium; I had not asked the proper questions early enough. My company did not offer mortgages for condos with only a 5% down payment, especially a condo that was “not approved”, as this one was not. So let’s continue the show and tell.
Location, location, location? ... need more info
When most people think of buying a house, they may picture a typical 2 to 4 bedroom detached dwelling, with a white picket fence, small yard, and stunning landscaping. While that might be the image in your personal photo shoot, let’s be careful. Is the home your buying a condo, townhome, PUD, coop, multifamily, a single family attached, a life estate, a tenancy-in-common, a condop (seriously), a pied-à-terre (my personal favorite – it sounds so footloose and ‘earthy’ -- sorry), a leasehold, a mixed use commercial, a duplex, a condotel, a horse farm, in a gated community, or is it on leased land? No, that is not a complete list of possibilities and each of these have idiosyncrasies that may preclude financing. Let’s examine just a few of the most popular.
Condo versus Townhouse
By definition, when you purchase a condominium you own only the inside of the property – not the walls or exterior. Further, you most likely share walls with neighbors next door to you, above you or below you. Check to ensure there are no holes drilled in said walls that allow Peeping Toms to examine you more closely than your Underwriter, unless that’s your ‘thing’, of course. Stairs, gardens, common areas, pools, and lucky-you elevators are generally owned collectively by all unit owners. A townhouse is more like a house in that you normally own the structure itself, the land it is on, the roof, the garage, etc. But check to see if the townhouse you are buying is “fee simple”. You may be responsible for much more of the exterior upkeep than for developments where the Home Owners Association (HOA) takes care of more than that.
In both cases, you pay monthly maintenance fees to the homeowner’s association. These fees may be used for payment to association employees and property maintenance – snow removal, pool upkeep, grass moving, common area maintenance, etc. Check to see what is and what is not included. You may need to privately purchase applicable insurance for things not covered. You may need to pay for taxes, heat, water, sewer, electric, TV, landscaping and nightlife. (Oops, you will probably have to pay for that, no matter where you live, and your Underwriter will almost never ask what you do then!) The HOA fees and any applicable insurances will be included as part of the PITI and DTI when your lender is determining your qualifications.
My first home purchase was a townhouse. I had done minimal homework and knew I owned the land. Yippee! So I promptly added a back yard deck and a lovely garden and even more promptly got smacked upside the head with a hefty fine for not having obtained HOA approval prior to undertaking the work. Yes, the Home Owner’s Association is tasked with keeping all grounds looking uniformly lovely. DIY projects are frowned upon (unless you happen to submit appealing plans which obtain approval and have the skill to complete them, or the money to hire someone to do that for you.)
Before you picture that hot tub on your new deck, establish a rapport with the Homeowner’s Association. You will need information from them for your mortgage lender. For example, you may need to first determine if you are buying an “approved” unit (approved by HUD, Fannie Mae, Freddie Mac, your lender, etc. – unless your chosen lender finances “unapproved condos” - yay!) You may also need to gather the contact name, phone numbers and email address for the condo management company (the HOA), the insurance details, the property budget and information about how many units are owned by investors or how many are in foreclosure or what assessments (charges for unusual circumstances such as excessive snow removal or roof damage in a wind storm, etc.) are in place. You may need to have data about phasing – past and future – or sections of the development. Ask the seller or your Realtor to provide as much of this information as possible early in the process and then ask your mortgage expert exactly what s/he needs for documentation.
NOT a Chicken Coop!
If you’re buying in or just outside of New York City or Washington DC or many other US cities, understand that a condo is not a coop (pronounced co-op), is not a condop, is not a commune! If you buy a coop, you technically own shares or stock in the privately held corporation which owns the building (if you own the building, you need not be reading this!) As a coop owner, you’re given the right to lease a living space from the building owners, and then you become part owner (a small part, in most cases.) Coops are considered personal property, not ‘real’ property, such as real estate like a single family detached house (or condo or ….) If you’re moving into a commune, you typically don’t need approval from anyone and don’t own anything real, like clothes.
Buying a coop requires the coop board to approve you as a new member, and this is not a ‘given’. Coop board denials are often the subject of juicy gossip. For example, the coop named Dakota in New York City where John Lennon and Lauren Bacall lived, reportedly denied membership to similarly rich and famous Cher and Billy Joel. And yes, if you’re lucky enough to buy a coop and obtain board approval, ask about those pesky monthly fees as well as the building “rules”.
One of These Things is not Like the Other
You may have heard of the term “white elephant ” outside of the circus, a lovely Nantucket Inn, or a kinky animal shop. In terms of housing, a “white elephant” most often refers to a home that is inexplicably priced higher than other similar homes or is just very different. Yes, some are quite fond of white elephants. Your mortgage lender is generally not. In 2008, as the story goes, singer Lee Ann Rimes and her husband custom-built a 23 room mansion in Franklin, TN. The following year, the marriage fell apart, but the house did not. The couple listed the 13,000+ square foot home with 6 bedrooms and 9 baths for $7,450,000. Other homes in Franklin TN (well, possibly Franklin in ANY state) are neither that large nor that expensive. This is an example of a “white elephant”. The gated mansion with two kitchens, 360 degree views, a salt water swimming pool, a yoga studio, and smart-house technology sold in mid-March of 2012 for $4,100,000. – not quite the price the formerly loving couple sought.
Another type of property that may pose financing challenges is a Manufactured Home. If you purchase a “double wide” because you’re just a plus size kind of guy or gal, be sure it and you meet the lender’s requirements. For example, while the FHA has guidelines you can follow in terms of obtaining financing on the home and the lot, the lender you choose may not offer this financing and you’ll need to go elsewhere – like Lane Bryant or Casual Male XL.
Don’t confuse a manufactured house with a modular house, with new construction, with a flip (we may save that one for an article all by itself!) And, yes, there are people who built, own, and live in tree houses, converted shipping containers, condo conversions, former airplanes, and other ‘odd’ spaces. This is America! You can choose to live wherever you want in whatever you’d like, assuming you can afford to do that. Because most mortgage lenders will not finance many of these unusual spaces, nor will the VA or FHA.
On the topic of FHA loans, these are not a “one size fits all” mortgage. I recall one of my loan officers attempting to obtain FHA financing on a house that was a mere 50 yards from an active rail line. Further, that house was painted hot pink (and had been painted with lead-based paint – NO good) and had a full “summer kitchen” (making it, then, a technical “two family”, not a single family dwelling.) Did I mention it needed a new roof also? This house didn’t look good in black and white, color, or even that sepia tone.
We also once tried to finance a “Bubble Home”. You know the house I mean …. It was completely round, constructed of what appeared to be dyed Styrofoam, and had no windows (allegedly to assist with ‘energy efficiency’). So what’s the problem, you ask? For one, it cost over $1.5 Million and the people buying it had $100,000 – in total. Even if they had another way to obtain funds for the closing costs, a $100,000 down payment on a $1.5 million dollar home represents a 6.7% down payment. Not shockingly, that’s just not enough. With less than 20% “down” or an LTV (loan-to-value ratio) below 80%, these home buyers would need mortgage insurance, or MI or PMI (kindly adding the word private there!) Mortgage insurance companies exist to sort of say to the mortgage lender “We think you’re taking a big risk doing this loan so we’ll charge your client some money and if it doesn’t work out, we’ll give some of that back to you that you won’t have lost as much.”
Further, it is often difficult to get "comps" (or comparable sales) for unusual homes. Your mortgage lender will have an appraiser tell them whether or not the price you are paying is appropriate -- not too high, not too low, jjjuuusssttt right. Appraisals mainly protect the lender and appraisers must be certified, licensed, and not married to our directly related to you, your Realtor, your Attorney, the home seller, or Jose Conseco (only partly joking here -- more on that when we cover the 'Mortgage Meltdown' in a later blog posting).
What's it Worth? The Appraisal
A home's appraised value is influenced by recent sales of similar properties (the comps) and by current markets. Aspects of the home such as number of bedrooms and bathrooms, floor plan functionality, upgrades, renovations, and square footage are also relevant in assessing the home's value. The appraiser must, in most cases, visually inspect the interior and exterior and note any conditions that adversely affect the property's value, such as needed repairs. Then, the house's sale price will be compared to other homes which recently sold to further ensure the price is reasonable.
Another property-happy friend of mine bought a huge new home for $2 Million is 2001. Three years later, a very similar and exquisite home two blocks away sold for $3 Million. My friend was ecstatic! Then the mortgage crash happened and the gorgeous McMansion was recently appraised for $1.4 Million -- ouch! However, a relative purchased a home for $200,000 just 4 years ago. If he bought it today (at least based on numerous comps near him), it would cost nearly twice that amount.
A home appraisal generally protects the bank from getting stuck with property that's worth less than they've invested. And it protects you from paying too much for a house simply because it was love at first sight. It is a snapshot of the estimate of a home's value at the moment in time when you choose to buy it. A home appraisal is NOT a home's "assessed" value (that typically has to do with paying your taxes and is determined by the Assessor's office in your government municipality). An appraisal is also not a home inspection. Home inspectors will check heating and air conditioning systems, make sure your plumbing and electric are up to code, and identify other risk factors associated with the home that could cost your plenty after closing. While your lender may not require a home inspection, every savvy home buyer needs to get one before signing on the dotted line.
But do sign for your piece of the American dream. And remember that home is where your WIFI connects automatically!