Cash Now… Loan Later Potential Pitfalls

The Main Pitfall of Cash Now, Loan Later Purchases

Some homebuyers opt to pay cash now and get their mortgage loan later. Cash purchases are more common now due to low inventory and multiple offers. See some reasons why HERE. Buyers who pay cash for a home but expect to get a loan later need to be aware of IRS rules. You can lose your mortgage interest rate deductions with this type of cash purchase. If a buyer intends to get a mortgage later, there are important things to be aware of.

Most lenders are not concerned about whether the homeowner wants to deduct the interest. They want to make a good loan that will be repaid. So if a buyer qualifies for the loan, they won’t worry about making sure it fits the mortgage loan deduction window. A new loan must be established within 90 days of the date of purchase to qualify for interest deductions.

Qualified mortgage interest, which is deductible, is based on the acquisition debt used to buy, build or improve a principal residence. The maximum mortgage amount of interest deduction is $750,000 of acquisition debt. When cash is paid for a property, the acquisition debt is zero. Zero acquisition debt means no mortgage interest deduction. After the window of opportunity, the only way to increase the acquisition debt is to make and finance improvements to the home.

Therefore, if you are considering paying cash for a home, it’s best to consult your tax advisor. Contact Sound Investments, Inc. Our owner is also a tax professional who can help explain the ramifications of this type of purchase.

Are You Well Positioned to Buy?

Position yourself for buying

REAL ESTATE INVENTORY REALITIES

If you are looking to buy a new home, it is critical that you are well positioned to buy. Right now, some buyers are becoming discouraged. They feel that there are not enough homes on the market, especially, in certain price ranges.  When they do find something they want, there may be multiple offers and they end up losing to another buyer. If you experience this, you may choose to wait until the market changes.  This is understandable. However, your wait may be very long, and it may end up costing you more.

Inflation is affecting all sectors of the economy; prices on food, cars, and electronics are going up as well as housing and mortgage rates.  Home prices rose 20.2% year over year in May 2022 over 2021, according to a recently released CoreLogic report.  The advantage for current homeowners wanting to move up is that their current home is now also worth more which will help pay the increased price for a larger home.

OPPORTUNITIES EXIST

And while it is true that housing inventory is at very low levels, over six million homes sold last year. For buyers, the problem was that available homes sold fast and there was a lot of competition for them. This certainly isn’t as easy as if there were four to six month’s supply of homes for sale. But, once you purchase a home, these same dynamics will be working in your favor to build your equity with appreciation.

BECOME WELL POSITIONED TO BUY

Successful buyers separate themselves by being well positioned to buy when the new listings hit the market.  They arm themselves with the following:

  • Working with a trusted real estate professional
  • Pre-approved by a local lender
  • Developed a plan to write a competitive offer
  • Determined their limits financially and emotionally.

Remember, six million people bought homes last year and you can be among the fortunate ones who buy one this year.  Be committed to what it takes in a highly competitive market.  Surround yourself with a competent and confident team that will produce the results you want.

For more information, download our Buyers Guide and schedule an appointment with us to get the facts about the best plan to get you into a home this year.

Avoid These Common Buyer Mistakes!

HOW TO AVOID COMMON BUYER MISTAKES

When buying any property, you want to avoid making these common buyer mistakes. Like driving a racecar, buying a home can be a very fast but complex process. And like racing, if you make a mistake, you can easily miss your chance to grab the position you want. Buying a new home is an emotional process. However, you if you don’t use your logic and the right information, it becomes much harder to get the home of your dreams. Let’s look at some tips about mistakes to avoid when you buy.

AVOID UNFAVORABLE FINANCIAL MISTAKES

Manage your credit score and make sure it is as high as you can make it. It’s important to know your credit score when you are looking to finance a new home. And keeping it as high as possible by avoiding bad financial practices is critical. Remember, borrowers with the best credit scores get the lowest mortgage rates.

Don’t look at new homes without being pre-approved for a loan first. Because the real estate market is so competitive, it is unlikely that your offer is accepted if you aren’t already pre-approved. It is also very likely that you will lose the opportunity to bid if you need to take the time to get a loan approval.

While we are on the topic of mortgage loans, do your homework! Shop around for the best mortgage rate available. Rates and fees are not the same from all lenders. Regardless of your credit score, different lending institutions will often offer different mortgage rates. Find the best one for you. You real estate agent can help you do this.

It is unwise to spend your entire savings to purchase a home. Hidden and unexpected homeowner costs can leave you vulnerable in emergencies. 

KNOW THE NEIGHBORHOOD

Research the neighborhoods you want to look in. Find out about schools, crime statistics, access to amenities and emergency services. These will affect both how happy you will be while in your new home, and how much value you’ll receive when it’s time to sell. Also find out what recent “comparables” in the neighborhood sold for. This will give you a realistic idea of what range of prices you can expect.

Good schools affect your property value positively.

PROTECT YOUR RIGHTS

Never waive the right to inspection. Waiving the right for inspection may make your offer look better, but you give up protection from unexpected problems and expenses. Be wary especially is the seller is eager to accept your offer only if you waive inspections.

Not working with a real estate professional is a big mistake some buyers make. Purchasing real estate is an extremely complex process. If you don’t believe us, you only have to go through all the documents and requirements someone else has on purchasing their property. You can see that without inside knowledge to the terms, language and processed involved you can easily get lost and confused. A real estate expert has the knowledge to guide you successfully through the process.

Remember. With a reputable real estate professional on you side, you can easily avoid these common buyer mistakes and others. For more information on how this is done, you can contact us at (510)-244-0081. Or Click Here to send us a message. Sound Investments, Inc. is here to help you!

Skills Needed in Today’s Real Estate Market  

Skills Needed in Today's Real Estate Market

Why Skills Are Needed

In today’s ultra-competitive real estate market there is only 1.7 months supply of inventory. Compare this to the 6 months supply in a balanced market. Moreover, the average home is getting 4.8 offers per sale. It is more important than ever to have the right person “champion” your cause when purchasing real estate. And that’s why there are high-level skills needed in today’s real estate market.

Sellers’ and buyers’ objectives are different and, in many cases opposing in nature.  Sellers attempt to get the most money for their home. They also want to minimize expenses and avoid any issues that could cause delays.  Buyers want to be treated fairly and have an opportunity to buy the home of their choice. They also want to take advantage of the protections of normal contingencies for things like mortgage approval and inspections.

In most situations, there are two real estate agents involved in a single sale.  You want your champion to be the most capable person available. Furthermore, you want them to have the skills needed in today’s real estate market

What Type of Skills Are Needed in Today’s Real Estate Market?

There are skills that agents need in today’s market. One of the most important is the ability to conduct negotiations.  Regardless of which side of the fence you’re on, your agent needs to be skilled in negotiating on your behalf.  Remember, every part of the contract is a negotiation. This starts with the price then continues to the other financial complex financial and transaction agreements involved with the purchase.  What’s a reasonable amount of earnest money?  Can the sale be “as is” yet still allow buyer inspections so you cqn be fully aware of what you’re buying? Will the buyer provide a CLUE report for the property? [Read our post about CLUE Reports. Then click here to learn more about CLUE Reports.]

The buyer wants to negotiate the best terms possible with the seller. They are depending on their agent to work for them to get them.  The home inspector is hired by the buyer to determine the condition of the home. The inspector and will point out what repairs are necessary. Your agent will help you negotiate who pays for those repaires.

Your lender hires an appraiser to determine the value of the home. This is because the loan will be secured by the property.  Recent sales can be used as comparables. But they trail the market. This becomes a challenge in rapidly appreciating markets, especially, when there are multiple offers. 

Consider Legal, Ethical and Personal Aspects of the Sale

And since multiple offers are the norm currently, agents must know how best to handle them based on the seller’s or buyer’s perspective.  There are legal and ethical procedures that must be followed. But an agent’s experience can contribute to creating a more favorable outcome.

The skilled and experienced negotiator understands that every transaction is different because of dealing with individuals, their families, their needs, and their emotions.  The role of the third-party negotiator can be invaluable to the success of the transaction. This is not only based on their experience but the juxtaposition to the principals and their objectivity of trying to reach a compromise.

Let Sound Investments be your skills champion. Click here to see what we can provide for you when looking to purchase a new home or other property.

Using a CLUE Report

Get a Clue Report

What is a CLUE Report?

Have you ever heard of using a CLUE Report when purchasing a new home? People purchasing a used car have most likely heard of CARFAX vehicle history reports. These help them avoid buying a car with costly hidden problems.  Buyers are less likely to know about CLUE Reports. These reports disclose some of the repair history of properties,

Lexis Nexis C.L.U.E. (Claims Loss Underwriting Exchange) is a claims history database that enables insurance companies to access consumer claims. These reports go back for the previous seven years when they are underwriting a risk or rating an insurance policy.

An insurance underwriter could identify a previous claim for substantial damage to a property. They can then find out about repair history before assuming the risk as a new insurer.  Similarly, a buyer benefits from knowing about former claims that may affect property value or possible, future repairs.

How Can a CLUE Report Help?

A CLUE report can discover insurance claims on a home. A buyer could check to see whether the repairs were done properly.  These reports are not directly available to potential buyers. However, their property casualty insurance agent could order a report during negotiations with the seller. A clean CLUE Report can be a condition of a successful contract of sale. 

With a CLUE Report, a buyer could pinpoint issues they were concerned about. They could address those things with the inspector during the inspection period.  Also, the CLUE Report could detect items that may not be visible during a home inspection.

In some cases, a listing agent might suggest a seller share their CLUE Report. This would show the buyer acting in the spirit of full disclosure to potential buyers.  Even if there were claims. if the repairs were done properly it could help to achieve a successful sale.

Obtaining a Report on Your Property

A current homeowner can request one free CLUE report every twelve months online or by calling 888-497-0011.  You can also send an email to consumer.documents@LexisNexisRisk.com.  You will need to provide your first and last name, social security number, driver’s license number and state in which it was issued, date of birth, current home address and phone number.  For more information, see Lexis Nexis Consumer Portal.

If a buyer doesn’t have a property casualty insurance agent, your real estate agent can recommend one.

Assuming a FHA or VA Loan

Assuming a VA Home Loan

Assuming a FHA or VA Loan Hasn’t Been Popular

You may not have heard of anyone assuming a FHA or VA home loan on an existing mortgage. You might not have known they were even possible any longer.  The reason this type of loan assumption hasn’t been popular for over thirty years is simple. It didn’t make financial sense. But now that interest rates are increasing, it may be an opportunity for some homebuyers.

Conventional loans added clauses to mortgages back in the early 80’s that gave the noteholder the right to raise the interest rate if a loan was assumed, as well as require the new buyer to qualify for the loan.  This essentially ended the practice of assuming conventional mortgages.

Then, in the late 80’s, FHA and VA mortgages did impose the right to qualify the new buyers, but the big difference was that the mortgage rate would remain the same as that for the original borrower.  Even so, it still effectively ended the assumptions of FHA and VA mortgages because rates on mortgages trended down for the next thirty years.

Why FHA and VH Loan Assumption Is Now Worth Looking Into

There was really no benefit to assume a mortgage that still required qualifying because it was possible to obtain a new mortgage with a lower rate.  Generations of buyers have never even contemplated assuming a mortgage. However, now it might well be an alternative that will lower the cost of buying a home. This is because mortgage rates hit a bottom in early 2021 and have been increasing ever since. Therefore, if the interest rate on the existing mortgage is less than the rate on a new mortgage, there could be a savings.

In addition to that, there are fewer closing costs involved on assumptions of FHA and VA mortgages than originating new mortgages.  Another benefit is that when you assume an existing mortgage, you will be further into the amortization schedule. This means your equity-buildup occurs faster than it would with a new loan.  And finally, lower interest rate loans amortize faster than higher rate loans.

Potential Difficulty in Assuming a Loan

The difficulty in this situation is that many buyers don’t have enough money to cover purchasing the equity on the existing home. But there is a potential remedy for that.  Let’s assume the buyer was considering a 90% conventional loan.  If they identified a home with an assumable mortgage, they could put the same 10% down payment in cash toward the equity. The buyer could then secure a second mortgage for the difference.

There are several lenders that make this type of loan. Buyers need to shop and compare rates and fees just like they would on a new first mortgage.  Your agent can suggest lenders for second mortgages.

If you want to take advantage of VHA loan assumption, it may be difficult to find them. Unfortunately most search filters on portal websites do not include assumable mortgages.  You can get assistance from your real estate agent to find them.  

Paying Points to Lower the Rate

Paying down points can end up helping you save money

Paying Points on Your Mortgage

One way to lower your mortgage payment is “paying points” on your mortgage. This means to buy down the interest rate for the life of the mortgage with discount points at closing. A discount point is one percent of the mortgage borrowed. Lenders collect this fee up-front to increase the yield on the note in exchange for a lower interest rate.

Two other commonly used ways to lower your mortgage payments are to make a larger down payment (especially if it eliminates private mortgage insurance) and improve your credit score before applying for a mortgage. However, you may get additional benefit from paying points on your mortgage

Here’s an Example

Let’s look at two options on a $315,000 mortgage for 30 years at 4% interest with no points compared to a 3.75% interest rate with one-point. The principal and interest payment on the 4% loan is $1,503.86. Compare this to $1,458.81 on the 3.75% loan.

The $45.04 savings is available because the buyer is willing to pay $3,150 in points. By dividing the monthly savings into the points paid, you can determine the breakeven point. In this example, if the buyer is plans to stay in this home for at least 70 months, they would recapture the cost of the discount points. Each month after that would realize savings.

Accelerating Amortization and Tax Benefit

Another interesting thing to consider is that lower interest rate loans amortize faster; in other words, they build equity faster by paying off the loan sooner. If the buyer stayed in the home for 10 years, their unpaid balance in this example is $2,117.38 lower than the 4% mortgage. Combine that with the $2,259.29 in savings from the breakeven point to the end of 10 years and the buyer. This makes the buyer is $4,372.67 better off buying down the mortgage by paying the additional points.

For a person buying a home, it is sometimes difficult to come up with the extra amount for the points. However, an additional benefit you have is that the points paid are considered interest by IRS and can be deducted in the year paid.

How Do Discount Points Work?

A rule of thumb commonly used is that one discount point lowers the quoted mortgage rate by ¼% or 25 basis points. A lender may quote X% + .6 points for a mortgage. Using this scenario, to lower the mortgage rate by .25%, the buyer would need to pay 1.6 points. It is important to note that each lender determines the pricing of points for the loans they make.

It may be beneficial to a buyer to pay points depending on how long they plan on being in that home. Learn more about whether you should consider paying points. Use this Will Points Make a Difference calculator and download the Buyers Guide.

The Value of Having a Real Estate Agent

The value of having a real estate agent

Before you shop for your new home, don’t underestimate the value of having a real estate agent or broker to help you. This short presentation below can provide topics to cover when you are selecting an agent to help you.

Remember, an agent can help you in multiple areas of the home buying process. Whether that is learning more about the area you are searching in or actually having property examined to look for any potential problems, they should help you.

On top of that, they can connect you with financial professionals and mortgage specialists. They can get estimates for work that needs to be done to the property before you take ownership. And, they can assist with any contractor searches because of their local networks.

Finally, they can negotiate in your behalf to look for better financing, pricing terms and features.

Most Valued Real Estate Agent Benefits

We Can Help

Want to learn more? Contact us by calling us at (510) 244-0085, or CLICK HERE to leave us a message. Whether you need assistance in all areas of home buying, or if you are unsure of only a single aspect of the process, we are here to help you. We can show you the real value of having a real estate agent

Homeownership Cycle and Inventory

Moving to a Larger Home

An interesting homeownership cycle begins with a starter home and progresses to larger and smaller homes throughout a person’s lifetime. Within a few years after purchasing their initial home, they might move up to a little larger house. They could simply want a larger home and can afford it, or their increased family size may be motivating the move.

While the children are small, a homeowner can probably get by with less space. As the children grow or with the addition with more children, the need for more room becomes more pressing. Depending on the size of the family, this will last some time. But the cycle goes the other way too. As children leave for college or find their own living space, parents may find that they no longer need the larger home.

Moving to a Smaller Home

In the interest of saving money or possibly convenience, owners may migrate from a larger home to a smaller home. This occurs before they consider a move to an assisted living facility or possibly, a nursing home. Some homeowners even retro-fit a smaller home with equipment and safety devices that will allow them to continue to live independently, Another alternative, many homeowners are electing is to move in with their children or other family members.

How Many Times We Move In Our Lifetime

According to the US Census Bureau’s American Community Survey, a person in the United States can expect to move 11.7 times in their lifetime. When that person is 18 years old, they can expect to move another 9.1 times. By age 45, they can expect another 2.7 moves in their lifetime.

How the Homeownership Cycle Affects Available Home Inventory

One of the suspected reasons affecting the low housing inventory in America now is due to a change in the homeownership cycle. Homeowners who would usually move at this time don’t because of current constrained inventories. They are afraid their home will sell and they may not be able to replace it with what they want. Builders have not kept up with the demand in the past twenty years. This has been a major contributor to the low inventory that housing is currently experiencing. Estimates show that it will take two million new homes a year for ten years to meet current levels of demand.

There are also other factors involved like the fact that since 2007, the owner’s tenure in their home has more than doubled from five years to 10.6 years. People are staying in their homes longer which means the homes are not coming on the market for sale.
Another consideration is that sellers with extremely low mortgage rates are reluctant to buy another house which would have to be financed at a higher rate than they are currently paying.

Get Help When You Make Your Move

Sound Investments, Inc. can provide important information and has the experience essential to making a smooth move. We can help you – regardless of where you are in the homeownership cycle. Having the facts reduces the risk of unexpected outcomes. Click here to contact us now if you have questions about selling your home.

Risky Negotiation Tactics

Risks Not Worth Taking

Today’s housing market’s extremely low supply. That means it is especially important “NOT” to rely on risky negotiation tactics. You don’t want to lose a property you truly want just because you relied on a weak tactic.

  • Lowball offers that offend sellers
  • Asking for the “Moon” in the way of personal property or concessions
  • Using inspections to renegotiate AFTER the contract was accepted
  • “Take it of Leave it” offers hoping to intimidate the sellers into a accepting your offer

Sellers in the current market know that demand is high. They will most likely receive multiple offers. Many of those offers may even be above asking price. Therefor, using intimidation or being obstinate about things that are not really important doesn’t help your bid get accepted.

So is it really worth losing the home of your dreams?

Our Advice

Instead of taking a negative approach and using risky negotiation tactics, you can take actions that can increase your chances of success. If you haven’t read our post about “Writing a Successful Offer in a Low Inventory Market,” Click here and learn some tricks to help your bid get selected.