About Netting Escrows
When you are looking to refinance your mortgage, you would like to see all possible options to lower your cash to close.
If you are paying your property taxes and homeowner’s insurance through an escrow account you should consider the option of netting the escrow when you are refinancing your mortgage.
In this post, we will understand what is netting escrows in detail.
What Are Netting Escrows?
Escrow netting is only available on request for individuals who are looking to refinance their current mortgage.
It allows the borrower to credit the balance in the escrow account towards the outstanding mortgage balance at the time of requesting a payoff.
Escrow is money set aside at the beginning of a mortgage (and as part of the monthly payment) to ensure that property taxes or property insurance are always paid on time.
This escrow account helps you to set money aside for paying property taxes and homeowner’s insurance before they are due so that you don’t have to pay it in a lump sum.
When you are refinancing if you request to net your escrow, the lender will send you the payoff after deducting the escrow balance from your existing mortgage balance.
How Does Netting Escrows Work?
When you refinance, escrow netting will allow you to apply the credit of the balance amount toward repaying your existing mortgage.
In other words, netting escrows help reduce the principal amount for the mortgage that you are going to refinance. Let’s give an example.
John refinances his mortgage with an outstanding balance of $200,000. He has $2,000 in his old escrow account.
He requests for netting his escrow. With the request the lender nets his escrow balance with the current payoff and his new refinance principal amount would be $198,000.
In another example, Jane refinances her mortgage with a balance of $200,000. She decides not to net the escrow.
Her balance in the escrow account is $2,000. In this case, the new refinance principal amount is $200,000 and she would receive a check from the lender for $2,000.
In John’s case, since the new principal amount is lowered by $2,000, this means that the monthly payments that he would be paying would be less than what Jane would be paying considering that both of them get the same interest rate and loan term.
It is important to keep in mind that the netting escrows option is not available for all types of refinances.
FHA does allow the borrowers to net their escrows while refinancing their current FHA loan, however not all the lenders would provide this option.
It is better to check with your lender before you refinance to check if they provide this option.
Anyways, you would have to pay escrow when you refinance; however, escrow netting could help you to lower your monthly payments.
How To Request For Netting Escrows With The Lenders?
Ensure that you speak to the appropriate department and/or management. Be patient with what you ask for. Typically, the lender will ask you to submit a written application.
Submit the request to the payoff department via the website, email, or fax. Then wait for the correct number of days and call back to follow up!
The request letter must include the following: It should mention that you are requesting to net your escrow balance with your payoff. Ensure that the request includes your name, address, and correct loan number.
After mentioning all the above things, sign the request letter with the date.
Not all lenders accept e-signs. Most of the lenders would require a wet signature for this kind of request.
Even if the e-signs are accepted by some lenders, it may take time to process the request.
The Pros And Cons Of Netting Escrows?
The Pros:
When you refinance your current mortgage, you have two options. You can pay the new escrow amount at the closing and receive a check for the escrow balance after the closing, or you can request to net the escrow and apply a credit to the current mortgage balance.
Either way, a new escrow account needs to be set up as part of your monthly mortgage payment once you refinance.
Hence, Escrow netting can lower the principal balance of your new mortgage. Finally, a lower principal helps borrowers save money over the life of the loan.
The Cons:
The downside of netting escrow is that returning the original escrow balance will not result in a refund.
You won’t have access to the escrow funds. Instead, the money is sent to help you with your next mortgage principal.
Conclusion
Netting escrows could be one of the best options to save money on your mortgage refinance in the long run.
However, this option may not be available to every lender. Ensure that you speak to your lender before refinancing to check if this option is available with them.
If you do not request to net your escrow, by default the lender would refund the amount to you after the closing.
About Fixtures in Real Estate
When buying or selling a property, it’s essential to understand the concept of fixtures in real estate.
Fixtures are an integral part of a property, and their determination can have significant implications for both buyers and sellers.
In this blog post, we will explore what fixtures are, how they are uniquely determined, and the impact they have on real estate transactions.
Defining Fixtures
In real estate, fixtures refer to items that are affixed to the property in such a way that they become part of it.
They are typically immovable and permanently attached, making them a crucial consideration in property transactions.
Fixtures can include items like built-in appliances, lighting fixtures, plumbing systems, heating and cooling systems, and even certain types of landscaping.
Uniquely Determining Fixtures
The determination of whether an item is a fixture or not can be a complex matter.
While some fixtures are obvious, such as a chandelier or a built-in oven, others can present more ambiguity.
Several key factors help uniquely determine whether an item qualifies as a fixture:
- Method of Attachment: The method by which an item is attached to the property is an essential factor in determining its fixture status. If an item is permanently affixed, such as by nails, screws, or bolts, it is more likely to be considered a fixture. Conversely, items that can be easily removed without causing damage are generally not fixtures.
- Adaptability: If an item is specially designed or customized to fit a particular space, it is more likely to be considered a fixture. For example, custom-made built-in shelves or cabinets are typically considered fixtures because they are designed to fit a specific area.
- The intent of the Parties: The intention of the buyer and seller plays a significant role in determining whether an item is a fixture. If the parties explicitly state their intentions in the purchase agreement or if it is commonly understood that an item is included or excluded from the sale, it can influence the fixture determination.
- Relationship to the Property: The item’s relationship to the property is another factor to consider. If the removal of an item would cause damage or alter the property’s functionality, it is more likely to be considered a fixture. For example, removing a central heating system would significantly impact the property’s value and functionality.
Legal Precedence and Jurisdiction
The determination of fixtures may also vary depending on the legal precedent and jurisdiction.
Courts often rely on established legal tests, such as the “intention test” or the “attachment test,” to decide whether an item qualifies as a fixture.
These tests help provide clarity and consistency in fixture determination.
It is crucial to consult local laws, regulations, and legal professionals familiar with real estate practices in your jurisdiction to ensure accurate and reliable determinations of fixtures in property transactions.
Local laws may have specific provisions that further define what qualifies as a fixture and may override any prior agreements between buyers and sellers.
Implications for Buyers and Sellers
Understanding fixtures is essential for both buyers and sellers in real estate transactions.
For sellers, identifying and properly disclosing fixtures to potential buyers can help avoid disputes and legal issues down the line. It ensures transparency and builds trust between parties.
Buyers, on the other hand, need to be aware of the fixtures included in the property they are purchasing.
Fixtures can significantly impact the value of a property and influence the decision to buy.
Being knowledgeable about fixtures allows buyers to make informed choices and negotiate terms accordingly.
Conclusion
Fixtures play a crucial role in real estate transactions, as they are an inherent part of the property.
Determining whether an item qualifies as a fixture is a multifaceted process, considering factors such as attachment, adaptability, intent of the parties, and relationship to the property.
Understanding fixtures helps both buyers and sellers navigate property transactions with clarity and confidence.
It is advisable to seek legal guidance and consult local laws to ensure accurate determinations in line with the jurisdiction’s requirements.
About Blue Tape Walkthrough
Just like many potential homeowners, you have decided to construct your home, instead of buying a move-in ready home.
The process of constructing your home could be intimidating, and there could be steps that you need to follow to ensure the construction is completed as per your anticipation.
One of the most important steps in the process is a blue tape walk-through. In this post, we will learn what a blue tape walkthrough is in detail.
What Is A Blue Tape Walkthrough?
Also known as blue tape inspection, a blue tape walkthrough is a part of new home construction.
This type of walkthrough is usually conducted after 3-4 weeks once the new home construction is completed.
At that time, the potential buyer meets with a builder’s representative, such as the agent representing the builder or the site manager, to proceed with the walkthrough of the newly constructed home.
The buyers have the option to bring their real estate agent or a knowledgeable person to help them address any issues in the construction.
Blue tape inspection is just like a regular home inspection in which the buyer will go through any issues in the home, whether big or small, that they want to fix.
These issues may include major blemishes like a crack in walls and minor blemishes like the incorrect color combination.
The buyer, buyer’s agent or representative, and builder’s agent will together address these issues and mark them with the help of blue painter’s tape. Hence it is called a “Blue Tape Walkthrough.”
Blue tape inspection helps the buyer and the builder identify problems big and small.
This way, buyers can request the builder to fix the issues before they decide to move in.
Some may be more important or require more work than others. But, if left untreated, serious damage can pose a real threat to the safety of the residents and the integrity of the house.
How Should You Prepare For A Blue Tape Walkthrough?
Going through the blue tape inspection for your new home construction can be overwhelming – you want to make sure you address everything from big to small issues before you move in. Below are some tips for you to prepare for a walkthrough.
- Take someone with you: It is better to have an extra set of eyes to ensure all the issues are addressed.
- Take your time: If you rush through this walkthrough, you will likely miss important defects. Give yourself at least a couple of hours to complete the inspection.
- Take some important tools to help you: The builder will provide blue tape to mark any issues around the house, but you will need a notebook, pen, and camera to record your notes. Also, take a flashlight to check dark spaces and a phone charger to check electrical points.
- Do not be startled by minor problems: During this walkthrough, you will mostly find minor issues. So the number of minor issues should not alarm you as it is very common to have as many as 30 to 40 minor issues during the walkthrough.
What Is The Blue Tape Walkthrough Checklist?
1 - Exterior:
Walkways and driveways: Check all exterior surfaces for cracks or uneven surfaces.
Irrigation: Check the exterior water connection and the sprinkler system.
Exterior Areas: Check patios, decks, and balconies for any soil defects and safety hazards. Test electrical appliances outside, such as lights or an outdoor kitchen, to make sure they are working.
Landscaping: All plants and grass should be present and provide a beautiful landscape.
Color: Verify that the color on the exterior of the building is the right color and free of bubbles or discoloration.
Roof: Inspect all roof tiles to ensure they are level and sealed. (A home inspector can also do this).
Gutters: Check that the gutters are clean and drain 4-6 feet from the foundation of the house. (A home inspector can also do this).
2 - Flooring:
Tiles: Inspect for missing, damaged, or loose tiles along with damaged grouting and cosmetic issues.
Hardwood: Walk around the different parts of the floor to check for creaks, loose boards, chips, or other imperfections.
Stairs: Improper installation of carpet or flooring on stairs can cause serious safety issues. Also, check that the stair railings are safely installed.
Molding and Trim: Check for loose, cracked, or damaged floor molding and trim.
Carpet: Check that the carpet is properly installed, especially on the edges, and that there are no stains.
3 - Systems and tools:
HVAC: Check the efficiency of air conditioning and heating and check the vents for adequate ventilation.
Plumbing: Test all faucets for hot and cold water flow and water flow. Check for leaks from pipes or pipes under the sink. Make sure all sinks, toilets, and tubs drain properly. Test the garbage disposal in the kitchen and check the laundry and dryer in the bathroom.
Safety systems: Check all safety systems and sensors to ensure they are working properly.
Appliances: Check the performance of every appliance in the home, including the refrigerator, dishwasher, oven, and stove.
Electrical: Test all light fixtures and outlets. Check the circuit breaker box to make sure all the light signals are working properly.
4 - Windows, walls, and ceilings:
Windows: All windows should open and close properly, window locks should work properly, and screens should fit properly.
Ceilings: Monitor the ceilings for the right color combination, and every bulge, crack, or defect that can imply any water damage.
Walls: Check walls and moldings to make sure they are properly painted with no marks or chips.
5 - Doors:
Garage Door: Test the garage door and make sure they work.
Front, Side, and Back Doors: Check all exterior doors to make sure they open and close properly, locks work properly, and there are no cosmetic issues. Also, test the doorbell.
Interior Doors: All interior doors should open and close properly and fit snugly in their frame. Be sure to check that the door handles and locks are working.
6 - Attic or basement:
Leaks or Water Damage: Water stains, water spots, or odors in the attic or basement are signs of a water problem.
Insulation: Check the attic or basement for adequate and properly installed insulation.
Ventilation: The attic or basement should have good air circulation and ventilation.
7 - Kitchen and bathroom:
Cabinets and Drawers: Open and close all cabinets and drawers and check for issues.
Countertops and Surfaces: Inspect all countertops and surfaces to ensure they meet your specifications and are free of cracks, chips, or other blemishes.
Bathroom Fixtures: Check that everything in the bathroom, such as water taps, towel racks, and mirrors are installed properly.
Conclusion
Blue-Tape Walkthroughs would help the buyer to make sure that the home is perfect before they move in.
In this walkthrough, the buyer would mostly find minor cosmetic issues which the builder can change quickly.
However, if there are any major changes make sure you give adequate time to the builder to fix those issues before you decide to occupy the property.
About Mortgage ATR Rules/QM Rules
When you are planning to purchase a new home, one of the most challenging things is to qualify for a mortgage.
You would have to provide various documents to the lender to prove that you are qualified for the mortgage according to the qualified mortgage guidelines.
While the lenders qualify you, they have to follow certain rules.
One of the rules that the lenders have to follow is known as ATR/QM rule. In this post, we will learn what ATR rule / QM rule is in detail.
What Is The CFPB ATR/QM Rules?
In 2010, Congress enacted a major law called the Dodd-Frank Wall Street Reformed Consumer Protection Act, also referred to as the Dodd-Frank Act.
The Act amended the Truth in Lending Act of 1968 (TILA), which was also called Regulation Z.
Once enacted, the Dodd-Frank Act changed the financial system and put new government agencies in place to manage it. This act was enacted to regularize the mortgage lending process to avoid another financial crisis like in 2008.
Many provisions of this Act came into effect over the years. In particular, the ATR/QM rule effectively makes it more difficult for lenders to grant mortgages that are not in the best interest of the applicant.
It requires financial companies, individuals, or organizations to make a “good faith and reasonable determination” about a borrower’s ability to repay the mortgage as per their terms.
This qualification should be completed before the financial institution gives the residential mortgage loan to the borrower.
The QM/ATR rules also set precautions to charge pre-payment penalties and impose record-keeping for up to 3 years once the lender and the borrower sign the mortgage contract.
However, some provisions and plans, such as temporary GSE (Government-Sponsored Enterprise) QMs, which include loans sold by companies such as Freddie Mac or Fannie Mae, have changed over time.
How Do QM/ ATR Rules Protect The Borrowers?
When a financial institution makes a good-faith determination, the information must be verified by reliable sources by the financial institution.
This may include third parties with consistent and reliable reporting systems. Following the standard underwriting requirements for ATR policies will help the lenders to ensure that the borrower has the funds to repay the loan.
The assessment is based on at least eight factors, including expected or reasonable current income or assets, latest employment status and verified income, loan repayments, other loans on the same asset, an expense related to the current asset, other debts, a DTI, and credit. The financial institution may consider other measures if required.
The QM / ATR rules operate on legal confirmation that the issuers behind the qualified mortgage have complied with the requirements of the ability to repay rule. Therefore, it is assumed that the lender’s loan is legal.
Compliance with pricing and margin laws provides the lender with a conclusive presumption.
This acts as a legal defense for lenders if the borrower decides to file a lawsuit. In particular, it gives them some cover if consumers accuse them of not making the right good-faith determination.
While this gives the lender less leverage, it also protects the borrower. Non-QMM loans with high-interest rates do not benefit from this security.
Instead, QMs whose values are above a certain threshold come to the point of convergence.
This gives a borrower a strong argument that the borrower did not comply with the ATR criteria before providing the loan.
What Are The Types Of Loans Exempted from the QM/ ATR rules?
The QM / ATR rules apply to almost all home or residentially secured consumer loans.
However, there are some exceptions. Transactions that do not fall under this definition are not covered by this rule. As a borrower, you might come across these loan types.
A reverse mortgage taken against the home equity is a good example of a loan that falls outside of this rule.
Other exceptions are:
- short-term loans, which provide short-term financing,
- Some types of loan modification (and some types of mortgage refinancing),
- Timeshare
- Home equity lines of credit
- Construction loans with less than 12 months of tenure
- Vacant land consumer credit transactions.
Some odd homeowner loans that are converted into standard home loans are also exempted from this rule.
However, this only applies if you continue to hold the loan and it meets certain conditions after it is refinanced.
In addition, certain loans provided or provided by creditors or loan programs may be excluded under this rule.
Conclusion
The QM / ATR rules take measures to protect borrowers by pushing lenders to meet higher standards compared to what they used to be.
Also, the new update to the rule does this without compromising the ability to acquire appropriate credit for consumers.
It supports innovative and safe lending for borrowers. The law has gone through many twists and turns since Congress signed the Dodd-Frank Act.
Therefore, the future of many borrowers may be subject to future legal changes to this rule.
About Hybrid Appraisal
Appraisal is one of the most important aspects of a real estate sales transaction.
Whether you are buying or selling the house, you have to get an appraisal done as a part of the property sales transaction.
Appraisals are also required if you are refinancing your current mortgage. With the help of appraisals, the buyer or the mortgage lender can determine the fair market value of the property.
What Is A Hybrid Appraisal?
A hybrid appraisal also called a bifurcated appraisal, is a report in which someone else (usually a real estate agent or third-party appraiser) will make an independent assessment of the internal and external aspects of the property that is being sold.
Once the assessment is completed by the agent or the third party, they will report their findings to the appraiser.
The appraiser will collect information on the property from public records, the MLS, and other sources to conclude the appraisal report and will provide the value of the property.
Hybrid appraisals are like traditional appraisals. However, the process of appraisal is split into two parts.
In traditional appraisals, the inspection and the appraisal report are provided by the same appraiser.
However, in hybrid, the inspection and the appraisal report are done by different individuals. That is why they are also called bifurcated appraisals.
When a hybrid is used for property appraisal, a third party will visit the property and conduct a physical inspection of the property, identifying its features, condition, location, size, and any other factors related to the value of the property.
This third party will inspect both the interior and exterior of the building and collect the same type of data used for traditional inspections.
The difference with a hybrid is that the individual inspecting the home – who can be a real estate agent, home inspector, another licensed inspector, or even a trainee appraiser – will submit the data that they have collected to the appraiser, who will finalize the value of the property.
The appraiser will complete their portion of the process by combining data collected by third parties and public records, MLS, and other sources to complete the appraisal report.
The appraiser will also consider comparable sales, also known as comps, to help determine the market value of the property they are considering.
This process allows the professional to focus on property valuation, where their skills and experience reside.
What Is Included In A Hybrid Appraisal Report?
The report will also contain information that supports the appraiser’s valuation, such as:
- Description of the exterior
- Trends in the local real estate market
- The condition of the property
- Features
- Area and structure
This report will also include:
- The intended use of the report and its recipients.
- Any special instructions from a lender or agency such as Federal Housing Administration (FHA), Fannie Mae, or Freddie Mac.
The Pros And Cons Of Hybrid Appraisals?
Pros:
Hybrid appraisals are very popular, mainly because they use the expertise of the appraiser.
The hybrid analysis allows the appraisers to focus on what they know how to do by comparing real estate sales data and evaluating properties.
Hybrid appraisals may take less time compared to traditional appraisals. A hybrid inspection usually takes 30-60 minutes.
It may take up to a week for the final report to come back. That’s even faster than the traditional 3-30 day turnaround time.
Cons:
The most important thing about hybrid assessment methods is accuracy. An appraiser may not trust others to accurately record the condition, style, or other characteristics of the property.
Third-party local inspectors may not have the same credentials or licenses as an appraiser. Their expertise can be questionable and lead to inaccurate home prices.
Conclusion
The right to order the appraisals is with the lender, you as a homebuyer or seller would not get the option to choose the type of appraisal required for the transaction.
The type of appraisals ordered by the lender depends on various situations and circumstances of the transaction.
Home valuations, like many aspects of real estate, can change with local real estate markets or national events like a pandemic.
And, depending on the availability of valuation professionals in your area, hybrid appraisals may be more or less common.
About VA Housing Grants
We all know about The Department of Veterans Affairs and their popular VA loan that helps veterans and active service members to buy a home with zero down payments.
However, veterans and service members that incurred service-related disabilities may find it difficult to buy a home or modify their home to live independently.
In such cases, The Department of Veterans Affairs provides grants for disabled veterans. In this post, we will understand all about VA housing grants in detail.
What Are VA Housing Grants?
VA housing grants are the funds provided to help veterans with disabilities adapt and make the best housing modifications for their comfortable living.
The VA department provides several grants each year for the construction or modification of housing to meet the needs of veterans. Unlike loans, these are grants that are not intended to be repaid.
There are different types of veteran housing grants that are provided by the VA department based on the disability type and the requirement of the veterans.
What Are The Types Of VA Housing Grants?
The VA has three types of housing grant programs that help veterans with certain lifelong service-related disabilities modify or build a house to meet their requirements.
The three types are the Specially Adapted Housing (SAH) Grant, Special Housing Adaptation (SHA) Grant, and Temporary Residence Adaptation (TRA) Grant. Let’s take understand the difference between these three types of grants.
1. Specially Adapted Housing (SAH) Grant
The SAH grant is for veterans with service-related disabilities who plan to use the funds to purchase, build, or modify their permanent residence.
To qualify for a SAH grant, a veteran must own (or plan to own) a home and have a qualifying service-related disability, such as:
- Loss or loss of use of lower limbs and permanent effects of disease or injury.
- The loss or loss of use of more than one limb.
- Blindness in both eyes and loss or loss of one leg.
- Some severe burns.
- Loss or damage to a lower limb (foot or leg) that prevents balance or walking without the aid of crutches, braces, wheelchairs, or canes.
Note: There is a limit on how many applicants can get this grant. Only 30 veterans and service members are allowed to receive this grant in a fiscal year. The maximum amount of grant allowed in SAH is $44,299 in 2022.
2. Special Home Adaptation (SHA) Grant
SHA grants also provide funding for veterans with service-related disabilities; however, the total grant amount is lower and the disabilities that qualify are different from the SAH grants.
Similar to the SAH grant, the SHA grant is for veterans who will use the money to purchase, build, or modify their permanent residence.
The most important thing is that this grant can be used for a house that is owned (or to be owned) by a veteran with certain service-related disabilities or a family member.
To qualify for an SHA grant, the list of service-related disabilities is slightly different than the SAH grant:
- Blindness in both eyes (vision of 20/200 or less)
- Loss or loss of use of both hands
- Some severe burns
- Injuries related to breathing or shortness of breath
Note: The maximum amount of grant allowed in SHA is $7,910 in 2022.
3. Temporary Residence Adaptation (TRA) Grant
If a disabled veteran is living temporarily in a family member’s home and needs to make some changes in the home to adapt to his disability, the veteran can receive funds for modification of the home through a Temporary Residence Adaptation (TRA) Grant.
To be eligible for a TRA grant, you must meet two main conditions:
- The disabled veteran applying for the grant must be eligible for either a SAH or SHA grant.
- The disabled veteran applying for the grant must live temporarily in the home of a family member that needs modifications required for the disabled veteran.
How To Apply For VA Housing Grants?
The process to apply for VA housing grants is very simple. This application for the grants for disabled veterans can be completed online through the VA’s eBenefits portal (https://www.ebenefits.va.gov/ebenefits/about/feature?feature=sah-grant) or by mail to the nearest VA Regional Lending Center (https://www.benefits.va.gov/HOMELOANS/contact_rlc_info.asp).
As an alternative, veterans can contact the VA directly by calling 800-827-1000. Once the application is submitted, veterans will be notified of the VA’s decision by mail or through the eBenefits portal (https://www.ebenefits.va.gov/ebenefits/about/feature?feature=sah-grant).
Conclusion
The VA housing grants are one of the best options for veterans with service-related disabilities to modify or change the interior or exterior of their property to live comfortably and independently.
You can use the above information to check if you qualify for one of the three available grant options. If you have any questions about any specific VA housing grants you can contact the VA department directly.
About Gross Rent Multiplier
If you are a real estate investor looking to buy an investment property, there are many aspects of the property that you might want to consider before investing in the property.
Many real estate investors would like to know the net operating income, vacancy rate, locations, and amenities before they purchase any investment property.
One such important aspect to consider before buying an investment property is the gross rent multiplier. In this post, we will understand what is a gross rent multiplier in detail.
What Is The Gross Rent Multiplier?
The Gross Rental Multiplier (GRM) is a formula used by real estate investors to compare the potential rental income of different comparable properties.
This valuation method is a simplified way to analyze a property’s buying worth compared to its value without performing a full analysis.
Real estate investors of all skill levels use this formula to quickly compare properties in their portfolios and make quick investment decisions.
It should be noted that GRM should not be used as a substitute for a thorough analysis of the investment property.
GRM helps investors to make a purchase decision for investment real estate based on comparable properties in a given market.
What Is The Importance OF GRM in Real Estate Investment?
Real estate investors actively looking for real estate would have more than one property that they are looking at.
They need to find a way to quickly evaluate opportunities so they can spend time in an in-depth analysis of the best property from all the potential options.
The GRM of the property will help the investors to determine on which property they can focus and conduct an in-depth analysis.
However, this doesn’t mean that you should ignore the fact that there could be other properties with better GRMs.
Lenders would evaluate an investment property based on several parameters and ratios to provide financing.
Income generated by the property and profitability is considered a few of the most important parameters by the lenders for qualification.
Knowing what a GRM is for the real estate you are planning to buy may help you to be prepared for the qualification of the loan.
However, other parameters that the lender would require to finance your investment property may include your credit score, assets, income, debts, etc.
What Is The GRM Formula?
Let’s look at the gross rent multiplier formula. This formula will help you to calculate the GRM for an investment property.
GRM = Current Market Value ∕ Annual Gross Rental Income
Example: $275,000 Current market value ∕ $36,000 Annual Gross Rental Income = 7.6 GRM
The GRM formula is used to compare the investment property’s current market value to its annual gross rental income.
As you can see from the above-mentioned example, it would take approximately seven and a half years to recoup the price of the property.
However, it is important to note that other expenses such as facility maintenance, vacant lots, insurance, and property taxes are not included in the GRM calculation.
However, GRM is only a calculation to help you make the right decision between comparable properties without considering these other costs, as these costs vary from property to property.
What Is Considered To Be A Good Rent Multiplier?
In our example, a GRM of 7.6 years was achieved. This number depends on several factors. Importantly, as real estate prices rise and the market cycle lengthens, the GRM will decline gradually.
Early in the real estate cycle, when the market is coming out of a downturn, GRM is usually relatively low as liquidity slowly begins to flow and investors return to buying real estate.
In such situations, high single-digit GRMs can be common. Once the market catches up and the availability of cash is higher both for lenders and investors, the GRM tends to go higher.
Conclusion
The gross rent multiplier is an easy-to-use calculation even if you are new to real estate investment with the possibility of error being minimized compared to other complex calculations.
In just a few seconds you would be able to make your decision on whether or not you should proceed to go further with the investment property purchase.
One thing to keep in mind while calculating GRM is that you need to compare it with properties with similar configurations in the neighborhood.
This will help you get more accurate results and make an informed decision.
About Probate Sale
Whether you are a first-time homebuyer or a seasoned real estate investor, when you are looking to buy a new home, you would expect to buy the property at the lowest price possible.
There are various ways you can buy properties below the market price such as foreclosures or short sales. However, there is one more option that you help you buy property at a lower than market price called a probate sale.
In this post, we will understand what is a probate sale in detail.
What Is A Probate Sale?
First, let’s discuss how real estate probate sales happen. When someone dies without a will, in the legal world it is called a dying intestate.
Any wealth or property left behind by the deceased goes through a legal process called probate. Probate proceedings are governed by a legal system administered by probate courts, which control the process accustomed by each state.
If the deceased owns real estate (also known as real property), it should be sold for the best possible price to increase the value of the property.
How Does A Probate Sale Work?
It is not uncommon for a homeowner to die in debt under their name. You must appoint an executor to properly administer the estate if you have a will.
These obligations may include distributing assets to beneficiaries, paying creditors, or selling the deceased’s home in the case of a probate real estate sale. In the absence of a will, the court will usually decide the sale itself or appoint a manager to decide the sale.
However, a real estate agent could be part of this transaction to show your property and coordinate sales.
Since the probate property is usually sold “as is”. This means that buyers may not be able to negotiate the price of the property if any repairs are required before the purchase.
This type of “take or leave” approach is not suitable for all buyers, but the advantage of buying such real estate is that you are more likely to achieve a sales price below market value.
Remember that making an offer is often the first of many steps in a real estate probate purchase. If the house is being sold by an administrator, the court may approve your offer before proceeding with the sale process.
In a probate real estate sale, the buyers may require to come up with additional cash upfront. According to the NAR, apart from your down payment, you may need at least a 10% additional upfront payment ready to go.
However, that extra money can be added to your down payment at closing. Circumstances may be different when the property is sold by the court instead of an executor of a will.
In this case, it could be set up as an auction where the highest bidder must pay in cash or check upfront.
The Benefits Of Buying Property Through A Probate Sale?
There are several reasons why sophisticated real estate investors and buyers are drawn to buying properties from real estate probate sales.
These types of sales are more complex than conventional sales, so the real estate prices can be low.
Even in a tight housing market, selling real estate through these types of sales can provide investment opportunities not available through traditional real estate channels.
These reasons are just a few of the potential benefits of buying real estate through a probate sale that can help investors save money in the long run.
The Drawbacks Of Buying Property Through A Probate Sale?
Probate sales may come with possible risks. Each state has very specific rules for this type of sale, which can be difficult for inexperienced property buyers.
It is important to work with an experienced estate agent and realtor in this situation as failure to follow the legal rules will result in the cancellation of the sale and the buyer may have to forfeit the deposit.
It is also important to note that there can be delays whenever the courts or the family of the deceased are involved.
Also before going for a real estate probate sale, a thorough home inspection is essential before buying the property because the current deceased who was the previous owner cannot report any problems with the home as part of the sale offer.
Conclusion
It is important to consider the risks and consider your level of knowledge and real estate terminology if you are a potential real estate investor considering purchasing real estate through a probate real estate sale.
In the state where the property is listed, assemble a highly qualified team, including attorneys and real estate agents experienced in buying and selling these types of properties and home inspectors who can identify unknown problems with the property.
It is also important to understand that you need to be aware of the cash and risk of loss to comply with the specifics of state law and pay your down payment.
About CEMA Loan
If you are looking to refinance your current mortgage or acquire a new one to buy a new home in New York, you are required to pay mortgage recording tax as per state laws.
Mortgage recording tax could be one of the major portions is the cost of refinancing or acquiring a mortgage.
For New Your residents, there is a loan option where they can save on the mortgage recording tax. In this post, we will understand what is CEMA loan in detail.
What Is A CEMA Loan?
CEMA, also known as Consolidation Extension and Modification Agreement is a loan option available to New York residents that can excessively reduce the cost of refinancing their mortgage.
In CEMA loans the borrowers have to pay the mortgage recording tax on only the unpaid mortgage balance (The difference between the current mortgage balance and the new loan amount).
New York State collects recording tax to record a new mortgage unless the property is a cooperative unit.
Along with the state tax, New York City, Yonkers, and various counties impose additional local taxes to record a mortgage.
In New York City, this mortgage recording tax is 1.8% if your loan amount is less than $500,000 and 1.925% if the mortgage balance is $500,000 and more.
If you are refinancing your mortgage in New York, you can save a good amount of money with the help of a Consolidation Extension and Modification Agreement loan.
What Are Consolidation Extension and Modification Agreement Loan Requirements?
The most immediate requirement for this type of loan is that you must live in New York State.
CEMA loans are available for refinances, FHA, and jumbo loans only. This type of loan is not available for VA loans.
CEMA loans are often used in place of traditional refinancing, but they are a very rare type of loan for new home buyers.
Most housing types and lifestyles are eligible for the Consolidation Extension and Modification Agreement loan, except for co-ops.
New York State does not levy mortgage taxes on co-ops because individual co-op shares are not considered real property.
Finding a lender that offers CEMA refinancing can be difficult, and you should make sure that the lender you choose does.
Ask if your current lender offers this type of loan before you find a new lender.
What Are The Pros and Cons Of A CEMA Loan?
Since we know what a Consolidation Extension and Modification Agreement loan in New York is, let’s understand if this type of loan is right for you.
As we all are aware that every loan comes with pros and cons, and you might want to look into this type of loan to make the right decision.
Pros:
Buying a new home is not cheap, and buying one in New York State real estate is very expensive, especially if you are looking to get one in NYC.
Hence, this type of loan can help you to save a good amount of money in terms of mortgage recording tax.
Instead of refinancing a mortgage traditionally, choosing a CEMA mortgage to refinance can save you thousands of dollars upfront.
You can also benefit from lower interest rates and lower closing costs with Consolidation Extension and Modification Agreement loans.
Cons:
A CEMA mortgage refinance can save you money in most cases, but getting one could be a time-consuming process.
New York State and your lender are required to follow specific procedures to process mortgages and transfer titles under CEMA regulations, so you only have to pay tax on the new amount in the transaction, not the full principal.
This means that CEMA mortgage refinancing requires a little more patience than regular refinancing as closing loans can take up to 60-90 days. However, they will continue to provide you with information throughout the process.
Conclusion
CEMA mortgage refinancing is one of the best options for residents in New York State looking to refinance their mortgage. You need to have patience if you decide to get this type of loan.
If you need want to close your refinance faster, you might want to consider going with the traditional method of refinancing.
However, keep in mind that going with the traditional method means paying additional mortgage recording tax.
About Loss Mitigation
When you take a mortgage you would always expect that you make your mortgage payment on time and never miss them and so does your lender.
However, due to some unforeseen circumstances, such as loss of job, medical emergency, or accidents, a borrower may experience financial hardship.
As a result, the borrower may be unable to make the mortgage payment which leads to foreclosure.
Foreclosure is an expensive procedure for lenders and a devastating situation for borrowers.
To avoid foreclosure one of the provision available is known as loss mitigation. In this post, we will learn what loss mitigation means and how it works in detail.
What Is Loss Mitigation?
As we have discussed above, there could be many reasons why a borrower can face financial hardship and miss his mortgage payments.
In such situations, it is ideal for both the mortgage lender and the homeowner to help the homeowner stay in their home and get back on their feet so they can eventually be current on their late payments.
With the help of loss mitigation, the homeowner can stay in the home without the foreclosure process.
Loss mitigation is a process designed to protect homeowners and mortgage holders from foreclosure procedures. This can be one of several strategies that homeowners can use to stay on top of their mortgage while staying in their homes.
In a worst-case scenario where the borrower defaults on the mortgage, loss mitigation can reduce the negative impact of foreclosures.
If you are having trouble repaying your mortgage, contact your mortgage servicer. Your service provider is the company to which you pay your mortgage payments.
Their job is to help with payment issues as well as collect payments and maintain an escrow account (if any).
Your provider may or may not be the mortgage lender you borrowed from. Rights to service your mortgage may be sold or bought by others.
What Are Different Types Of Loss Mitigation Options?
Based on the type of financial challenge you are in, your lender might offer you various types of mitigations.
Below mentioned are the options:
1 - Forbearance:
With the help of forbearance, you can reduce or temporarily stop paying your monthly mortgage payments.
Any outstanding amount will be added to your loan balance and will be repaid at the end of the grace period according to an agreed schedule known as the repayment plan.
Administrators may offer an option to extend the initial 6-month forbearance period by an additional 6 months (1 year in total).
After this period ends, the borrower repays the outstanding amount in regular monthly payments, usually over six months (or one year if the period is extended).
If you can repay the outstanding amount and resume normal payments during the forbearance period, you can contact your loan servicer to reinstate your mortgage.
2 - Deferred Payments:
A deferred payment is a way to pay the monthly payments that you were allowed to miss during the forbearance period.
In this type of mitigation option, the borrower needs to pay the missed payment amount at the end of the mortgage term, refinancing the current mortgage, or selling the property.
3 - Modification Of Mortgage:
In this option, the lender will change the complete term of your loan, such as the tenure and/or the interest rate to make the payments more affordable.
Based on your lender and the type of mortgage, you may be eligible to lower the monthly payments by up to 25% or by increasing your tenure of mortgage for up to 40 years.
A Short Sale
In this option, the loan servicer agrees that the home can be sold for less than the mortgage loan. Servicers will incur costs as they progress. When home prices fall, short-selling activity increases.
A foreclosure could still be a better option, but both sides still suffer. Mortgage servicers will lose their part of the profit and borrowers will get a negative impact on their credit and lose the opportunity to make a profit from the sale.
4 - Deed in lieu of foreclosure:
This is an option in which the borrower transfers the title of the property in the name of the loan servicer in exchange for loan forgiveness.
With a deed in lieu of foreclosure, both borrowers and the loan servicer can save a lot of time and money which might be included in a foreclosure process.
In some situations, the borrower can reach an agreement with the servicer to stay in the house for a specific time until they find alternate housing options.
Conclusion
Loss mitigation is a process that the lender goes through with the borrower before the foreclosure process. If none of the mitigations work, then the lender only has foreclosure as a last resort.
It is important to speak to your lender to discuss all the possible options if you are unable to make mortgage payments due to financial hardship.
Your lender or your loan servicers would always prefer any of the loss mitigation options over foreclosure.
About Gift Letter
When you are buying a home, you are likely required to have some reserve amount for the down payment and the rest would be covered by mortgage financing.
Usually, borrowers accumulate these funds and pay the down payment to the seller at the time of closing.
However, what if you don’t have enough funds to cover the down payment? Well, there is an option in which the borrower can receive a gift of funds from family, friends, or spouse. In this post, we will understand what a mortgage gift letter in detail is.
What Is A Gift Letter In A Mortgage?
A mortgage gift letter is a letter that is signed by the donor who provided gift funds to the receiver, certifying that the funds are not provided as a loan and that the donor is not expecting any repayment for the same.
These gifts are used by the buyer to cover the cost of the mortgage and the down payment to purchase a property.
The lender would require this letter to make sure that there is no additional debt taken by the borrower to cover the down payment or closing costs, as it may change the approval parameter for the borrower.
A gift letter signed by the donor proves that the borrower has not taken any additional debt or loan from the donor and does not have to repay that to the donor.
For example, let’s assume you want to buy a home and your parents provided $10,000 as a gift.
You can use this money for your down payment and closing costs. However, to do so you must convince your mortgage lender that it is not a debt that you have to repay.
To prove that, your parents need to provide a signed letter to the lender mentioning that it is a gift and not a debt.
The gift letter proves your relationship with the donor, the exact amount gifted along with the source of funds, and states that you are not responsible to pay it back.
What Is Included In A Gift Letter?
In most cases, the lender will provide a template for the mortgage gift letter. If your lender does not provide you with this letter, you can request the details that are required in the letter. Below is an example of what a mortgage gift letter might include.
[Donor’s Name]
[Donor’s Address]
[Donor’s Phone Number]
[Donor’s Relationship With The Recipient]
[Recipient’s Name]
[Recipient’s New Property Address]
[Gift amount and date it was provided or to be provided]
[Whether or not the recipient is planning to use these funds as earnest money deposit]
[Signature and date of both recipient and donor]
By signing this letter, you confirm that neither the donor nor the recipient has received a gift from any person, company, or entity related to the property or transaction being sold.
This includes sellers, brokers, contractors, mortgage lenders, or any related entity. Both recipient and donor agree that the gift must not be returned.
Who Can Provide Gift Of Funds In Mortgage?
In a conventional loan, the gift of funds can be given by family members. According to Fannie Mae and Freddie Mac, family members may include:
- Grandparent (including great, step, and foster)
- Niece or nephew (including step)
- Child (including step, foster, and adopted)
- Sibling (including step, foster, and adopted)
- Parent (including step and foster)
- Fiancé or fiancée
- In-laws (including parents, grandparents, aunt/uncle, brother- and sister-in-law)
- Aunt or uncle (including great and step)
- Cousin (including step and adopted)
- Spouse
- Domestic partner
- Godparents (Only For Fannie Mae)
- Relatives of domestic partner (Only For Fannie Mae)
- Former relatives (Only For Fannie Mae)
In the case of Fannie Mae, the borrower can also receive the gift of funds from his or her future in-laws.
In FHA loans the gifts could be received from all the above-mentioned individuals in addition to the charitable organization, labor unions, and employers.
USDA and VA loans do not have any restrictions on who can give funds as a gift apart from parties involved in the real estates transaction such as the seller, the developer, or the builder.
Conclusion
Receiving a gift to cover your mortgage closing costs and down payment from your family or friends may sound very exhilarating.
However, without the gift letter lender might not go beyond the underwriting process.
That is why this letter is very important if you are using gifts of funds to pay for the down payment and closing cost for your property purchase.
About Zero Coupon Mortgage
When you apply for a commercial mortgage there are many options that you can choose from.
Depending on the borrower’s requirement they can select conventional financing to hard money financing.
One such option available for borrowers is called a zero coupon mortgage. In this post, we will understand what is a zero coupon mortgage in detail.
What Is A Zero Coupon?
A Zero coupon mortgage is a long-term business loan that carries over all principal and interest payments until maturity.
In this type of mortgage, the interest is rolled back into the principal amount due to the loan being designed as an accrual note.
The principal of the debt increases over time as the interest charged is added to the original loan amount.
At maturity, the borrower must repay the entire mortgage balance or refinance it at an interest rate according to the current market.
This process can be beneficial for both parties. The borrower gets the mortgage to buy a commercial property at a very less cost, and the lender receives a lump sum amount at the end of maturity.
At maturity of the zero coupon loan, the borrower can pay off the loan anticipating that the value of the property is appreciated enough to pay off the loan.
How Does A Zero Coupon Mortgage Work?
These types of mortgages are similar to zero-coupon bonds. The coupon, the annual interest paid on the loan, is zero until the end date when everything must be repaid at once, with all the money borrowed.
Usually, this type of mortgage is for new business projects where the funds to pay the loan are not available until the project is completed.
With the help of this type of mortgage, the mortgage holder receives enough time to ensure that the cash flow is adequate to start the payments for the financed amount.
An example of this would be theatres. In this case, enough cash flow is not generated until the structure is complete and can start organizing events.
Since the lender does not collect the total interest plus repayment of principal until the loan matures, the credit risk is much higher than with a conventional commercial mortgage.
Therefore, lenders generally only offer this type of mortgage to business borrowers with the best credit history.
The interest rate charged on this type of mortgage is generally higher so that the lender can cover the lack of immediate return.
Example Of A Zero Coupon Mortgage
Let’s assume that a company borrows $500,000 from a lender as a zero-coupon loan with a maturity date of 15 years.
The company does not have to pay any payments to the lender for the next 15 years.
Unlike a conventional loan, the borrowing party does not need to start making the installments including the principal and interest once the loan is closed.
Once the loan matures the borrowing party needs to pay the entire amount of $500,000 plus the interest accrued for 15 years or refinance the mortgage according to the current market interest rate and pay off the original lender.
If the borrower is unable to refinance the mortgage or pay off the amount, the lender will foreclose the property.
Conclusion
A zero-coupon loan could be one of the best options for new businesses that are yet to start their operation and generate adequate cash flows.
However, the borrower needs to consider a few things before getting this type of financing.
The interest rate on this type of loan could be higher compared to a conventional commercial mortgage.
Also, the borrower needs to be prepared to either have enough capital to pay off the mortgage with the accumulated interest on maturity or refinance the mortgage and go into the entire financing process once again.
About Shared Appreciation Mortgage (SAM)
When you apply for a mortgage to buy a home, typically the lender will charge you an interest rate according to the current mortgage prime rate you qualify for based on your credit and income.
However, there is an option where you could be offered substantially low interest with the help of a shared appreciation mortgage. In this post, we will learn what is a shared appreciation mortgage (SAM) in detail.
What Is A Shared Appreciation Mortgage?
A shared appreciation mortgage, also known as SAM, is a mortgage loan where the lender offers an interest rate below the current prime rate in exchange for a share of the profits when the property is sold by the homeowner.
In this type of mortgage, the borrower needs to pay off the mortgage within a specific time.
It completely depends on the growth of the housing market to determine whether SAM is a good option.
In a market where house prices rise in the long run, it is usually not a good deal for the borrower because they still owe the outstanding principal if the value of the property falls.
On the other hand, if the borrower sells the property at a loss, the proportion of the appraised value called contingent interest will be zero.
Shared appreciation loans are also used by nonprofit organizations and governments.
They are structured as second mortgages, but borrowers don’t pay until they sell the property or refinance the first mortgage.
After the sale or refinancing, the borrower must repay the entire loan amount, plus part of the house price that was appreciated.
For example, let’s assume a borrower who bought a home for $190,000 with a loan of $152,000 and down payment of $38,000 at a below prime interest rate from a lender and agreed to pay 30% of the appreciated property value to the lender after 10 years.
Let’s assume after 10 years borrower paid off the mortgage amount of $152,000 and the property value was appreciated to $320,000.
This means the property value increased by $130,000 in 10 years. The borrower would have to pay $39,000 (130,000 x 30%) to the lender as 30% of the appreciated value according to the SAM agreement.
When To Consider Getting A SAM?
The biggest source of wealth for individuals and families in the U.S. is the appreciation of their property values.
Then why would someone share their wealth with the bank or a lender by getting SAM?
The answer is simple, in exchange for the shared appreciation value, the borrower will be getting the interest rate that he or she may otherwise be unable to qualify for. This will make their homeownership more affordable.
In a regular mortgage process, the lender will qualify the borrower and provide an interest rate based on the credit score, loan-to-value ratio, and current market condition.
However, for borrowers who have a weaker credit score or don’t have the money for a larger down payment, a SAM may be an option to get a more manageable mortgage payment.
There could be various parameters and contingencies in a shared appreciation mortgage that a borrower might find less interesting.
For example, there could be a phase-out clause in which the lender will collect an extra amount from the borrower if the borrower is unable to refinance or sell the property within the time specified in the SAM agreement.
This is so that the lender can recoup its share of the appreciation through these additional payments.
Conclusion
A shared appreciation mortgage is a great option for individuals that are looking for low-interest rates and more affordable monthly mortgage payments.
However, you may also need to consider that you would be sharing a huge chunk of your wealth with the lender if the property value is appreciated significantly.
On the other hand, if the property value drops drastically, you may still have to make provisions to pay the lender its share which means less profit for you.
About Zombie Foreclosure
We all know that when the homeowner is unable to make the payments on their mortgage the lender has all rights to seize the property and put it under foreclosure.
There are various types of foreclosures such as non-voluntary foreclosure, voluntary foreclosure, and zombie foreclosure.
In this post, we will understand what a zombie foreclosure is in detail.
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What Is A Zombie Foreclosure?
Zombie foreclosure refers to a situation where a homeowner abandons their home after receiving a notice of default from the lender, expecting that their property is being foreclosed by the lender.
There could be various reasons why the foreclosure process can be canceled by the lender.
If the foreclosure is canceled and the process remains incomplete, the title of the property will belong to the owner, who may not know that they still own the property and is in charge of the property financially.
Why is this referred to as Zombie Foreclosure? As its name suggests, the property is truly dead, growing more and more dilapidated over time, but its mere presence can continue to harm its homeowners and the surrounding communities.
For example, suppose that a homeowner vacates a property after defaulting on the mortgage payment, but the lender does not complete the foreclosure process, so the homeowner still holds his title for the property.
The property becomes ownerless for a long time and is not being maintained as per the requirement.
Due to this, the condition of the property worsens and creates concerns regarding the safety of the property which can reduce the value of the property in the surrounding community.
How Does A Zombie Foreclosure Works?
A property becomes a zombie home due to the homeowner’s misunderstanding about foreclosure.
During a typical foreclosure, the lender will intimate the borrower with a notice of default for the subject property.
After this notification is made, there is a waiting period in which they can make a large amount of payment to avoid the property going into the foreclosure process.
The payment that the borrower needs to pay could be the number of payments that were missed including the late fees and other charges.
Until the foreclosure process is completed, the homeowner continues to hold title to the property.
If the owners do not pay the default amount within the waiting period, the foreclosure process is initiated and the court will decide that the house belongs to the lender.
It is only after the court’s ruling that the homeowner needs to vacate the property as the ownership of the property is transferred to the lender.
Often, the lender decides not to complete the foreclosure process due to high repair costs or the huge amount of unpaid property taxes.
In such a case the lender will not take title to the home and is not required to notify the homeowner.
This is when the property becomes a zombie property and the title of the home is referred to as a zombie title.
How Does The Zombie Foreclosure Affect The Homeowners And The Surrounding Communities?
Abandoning your home and allowing it to be dilapidated will not relieve your responsibilities towards that home.
If you have moved to another house or city, the specter of your old house may continue to haunt you in many ways.
For instance:
- There could be property taxes that you owe to the county that may go into collections.
- Unpaid homeowner association fees could lead to legal actions in court.
- You may be charged for repairs, maintenance, trash removal, and other services.
- Zombie homes could lead to fines from zoning authorities for violating the zoning laws.
- Abandoning the property might result in financial instability and can affect your homeownership in the future.
- Zombie properties can cause damage to architecture and affect the value of the surrounding properties.
- Zombie houses can become an attraction for homeless people and attract vandalism or other crimes. This can drive away potential new residents and make current residents reconsider whether their neighborhood is still safe to live in.
Conclusion
Zombie foreclosures damage not only their current homeowner’s financial well-being but also the safety of the neighboring communities.
The best way to stay away from this type of foreclosure is to ensure that you understand the foreclosure process completely from the lender.
Make sure you vacant the home only once the process of foreclosure is complete.
About Voluntary Foreclosure
Once the borrower takes a mortgage on your property, the borrower is expected to repay the loan through monthly scheduled installments.
If the borrower is unable to repay the mortgage payments the lender has the right to foreclose the property and sell it to recover their loss.
This is how the mortgage process generally works. However, there is an option where the borrower does not have to wait for the lender to foreclose the property in case of missed payments.
In this post, we will understand what voluntary foreclosure is in detail.
What Is A Voluntary Foreclosure?
Voluntary foreclosure means a foreclosure that is initiated by the borrower. Borrowers are ready to go into foreclosure because they can’t repay the mortgage payments or they want to avoid future mortgage payments.
Just like involuntary foreclosure the ownership of the property is transferred to the lender from the borrower.
An involuntary foreclosure occurs when the borrower struggles to pay or avoids payment altogether.
In non-voluntary foreclosure, the borrower has to evict the property after notice is provided by the lender.
In the case of nonvoluntary foreclosure the borrower has to lease the property on the lender’s terms, hence, a friendly foreclosure is often the best option for borrowers.
They can evict the property on their terms and pay off the loan more quickly.
This type of foreclosure is bad for the borrower and can make it difficult for years to rent or buy a home and get approved for a loan, but they are not financially damaging as a non-voluntary foreclosure.
Hence, this option could make more sense if the borrowers are sure that they are unable to make further payments on their mortgage.
Many borrowers choose to open new credit lines or take new credit cards and plan for this type of foreclosure before their credit scores drop.
Most lenders allow borrowers to request a friendly foreclosure as it can make the process of undertaking the property and collecting debts faster and more efficient compared to a non-voluntary foreclosure.
A borrower might enter into this type of foreclosure due to unexpected unemployment, the perception that the borrower has too many overhead expenses to cover the mortgage payments, dramatic changes in the housing market, and fluctuating interest rates in the case of ARMS.
One of the most widely used voluntary foreclosures is a deed in lieu of foreclosure. Regulations, guidelines, and fees for this type of foreclosure are based on lenders and the state.
What Are The Pros and Cons of Voluntary Foreclosure?
Pros:
1. Prompt payments
This type of foreclosure is used as a final option for borrowers but may provide the quickest way to obtain relief from the debt.
The friendly foreclosure process can be faster than a nonvoluntary foreclosure. Moreover, this foreclosure is initiated by the borrower, which allows the borrower to determine if he can pay at any time.
2. Option to eviction for the borrower
It is better to leave your own home than to be forced to leave it by non-voluntary foreclosure.
In this type of foreclosure, the borrower can plan where they plan to move. It relieves you from the stress of your next home.
3. Less credit risk than non-voluntary foreclosure
Voluntary foreclosures have less impact on your credit than involuntary foreclosures.
A borrower can lower the credit impact and shorten its length by using a deed in lieu of foreclosure.
Deed in lieu of foreclosure will only impact 4 years compared to 7 years in case of non-voluntary foreclosure.
4. Faster and easier process for borrowers
Compared to a non-voluntary foreclosure, a voluntary foreclosure can be a win-win for both lender and borrower.
This process is faster and less stressful for both parties.
Cons:
1. Credit is still very important
Though the impact on credit is less in this type of foreclosure, it is still a negative one.
Your credit score will decrease and you would be facing the consequences in the future while acquiring credit.
2. Deficiency Judgement
The borrower may still be subject to a deficiency judgment after choosing to foreclose the property voluntarily.
3. Employment and credit problems
The borrower may face issues qualifying for credit in the future due to the negative impact on credit.
Some employers may deny your job application due to bad credit ratings.
Conclusion
There are various other ways to avoid this type of foreclosure. You can speak to your lender and come up with a payment plan option or forbearance plan.
Most lenders avoid any type of foreclosure as it is a costly and time-consuming option for them as well.
Even after considering all the options, if you foresee that you are still unable to make the payments in the future, voluntary foreclosure could be the best option.