Last week, I shared information about how to be the buyer whose offer is accepted. While I cannot provide a fail-safe way to guarantee your offer will be chosen, I can certainly give you good advice that will put your offer near the top of the list: get pre-approved for a loan.
Remember, property owners want to sell at the highest price in the shortest time period with the least inconvenience. If you’re the buyer who has been pre-approved for a loan, you help the seller achieve their goals.
Different types of loans require slightly different requirements to become pre-approved. However, all loans will require you to collect your assets, liabilities, tax returns, W-2s, credit history, and any other relevant financial information. Basically, you’ll need to prove to your lender that you can meet the cash requirements (any down payment and closing costs) and the ongoing monthly payment requirements (principal, interest, mortgage insurance, property taxes, etc.).
Here are some types of loans you may want to get pre-approved for.
California Veterans Administration (CALVET) – Last week, I described Veteran’s Administration Loans. A CALVET loan is slightly different. These are intended for active service members or military veterans who choose to purchase an owner-occupied home in California. All veterans who served on active duty a minimum of 90 days are eligible. They do not require any down payment or any mortgage insurance and rates are typically a little better than conventional loans. To get pre-approved, veterans must have the appropriate documentation to prove their veteran status. To learn more, visit www.calvet.ca.gov/HomeLoans.
Seller Carry Backs – For seller carry backs, the seller agrees to provide financing, usually when the buyer cannot secure a loan or the interest rate for that loan would be too high to make the deal work. The other reason for seller carry backs is that the seller may want to take advantage of tax benefits through an installment sale. In this case, the seller pays taxes on a portion of the down payment and a portion of the principal part of the monthly payment as well as on all the interest—far less than if the property had sold using a more conventional loan and the seller received payment for the full value of the property all at once.
A seller carry back is completely flexible on terms: it can be short-term or long-term, have a variable or fixed-rate, be interest only with balloon or fully amortized, and it can include any size down payment, especially when secured by the property changing hands plus other assets.
Be aware that when buyers agree to a seller carry back, they not only agree to the terms of the loan but also to keeping the Franchise Tax Board happy, which includes paying monthly taxes and completing required reports. On a $300,000 loan with a 30-year term and a competitive interest rate, the buyer would make a monthly payment to the seller of about $1,432 ($1,000 in interest and $432 in principal). The buyer would send a second check to the state for $12.97 for the first month. (The amount to the state changes each month depending on the remaining loan balance.) It’s a hassle, but it’s best to stay on the Franchise Tax Board’s good side.
Portfolio Loan – One of the ways banks make a profit is by charging interest on loans. A portfolio loan is a loan a bank intends to hold rather than sell back to federal lenders like FNMA and Freddie Mac. Usually, portfolio loans have less desirable terms for borrowers, including higher interest rates and shorter terms. However, the loans don’t have to comply with the strict guidelines of federal loan programs so they are available when conventional loans are not.
If you have questions about getting into real estate, please contact me at firstname.lastname@example.org or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. To see previous articles, visit www.realtyworldselzer.com and click on “How’s the Market.” Dick Selzer is a real estate broker who has been in the business for more than 40 years.