I had to opportunity to attend a lender panel presented by Security Title in August that allowed the real estate community to hear about details on different loan programs and lending requirements that are often ‘glossed’ over in the daily course of business. It was very enlightening and I walked away with an arsenal of information about the current lending environment and and borrower requirements. The lenders that presented (a power group of all WOMEN) included Amanda Torgerson from American Federal, Leslie Garner from Rocky Mountain Bank, Jeannita Bjorndal from Sky Federal Credit Union, Caroline Roy from Prime Mortgage Lending, Renee Gaugler from Wells Fargo Bank, Jennifer Erickson from Stockman Bank and Sheryl Huckabone from Bank of Bozeman. Each lender selected a different topic to cover – summarized below.
The Importance of Being Pre-Approved / Mortgage Application Checklist – Buyers should not take this step lightly or personally. Lenders need a TON of information and extensive research must be done on any borrower to achieve pre-approval. Pre-qualification is issued when a buyer ‘chats’ with a lender…there is no credit check and much research still needs to be accomplished. Pre-approval involves pulling of buyer’s credit, verification of income/assets and a price range has been established for the buyer by the lender. By the way, a price range established by a lender is not going to necessarily be what a client is comfortable with for a payment. Lenders need information on two years of income (pay-stubs, w2 forms, tax returns), two months of bank statements and they may require student transcripts for buyers that have been students during the past two years. It is advised if you’re planning to purchase a house to not make any large monetary purchases or transfer too much money around during the two months that will show on these statements.
Lending & Inspections – If there is a problem with functionality and/or safety items in a house, financing may be an issue. The loan may need to be held ‘in house’ i.e. within the bank and not sold on a secondary market. On a similar note, many loans held ‘in house’ for buyers that may not qualify for a loan that would be sold on the secondary market also require home inspections.
Residential vs Investment Loans – There are a huge gamut of options for buyers considering a home outside of their primary residence. A second home loan may work for buyers looking at property more than 50 miles from their primary residence. They’ll need to use the property for a specific amount of time yearly (i.e. can’t be rented out 52 weeks per year to another party). 10% down and same rates as a primary mortgage generally apply. What buyers qualify for hinges on the status of their primary loan, what their work history is and what their track record as a landlord has been previously. Additionally down payments vary. For a primary mortgage, buyers can put down as little as 5% on a conventional mortgage, 3.5% on an FHA mortgage and 10% for a two unit property. On a strict investment loan , buyers will generally have to place 15% down on a single family unit or a condo and more on 2-4 unit complexes. Prior history as a landlord with income stated on current taxes helps investors qualify – and helps to offset what reserves will be necessary to close the next investment property. The first investment property is general the hardest to get into. Buyers can generally have up to 10 properties mortgaged.
New Construction Loans – New construction loans, where the buyer is building for themselves, require 20% down and strong credit. Many times it is easier for a buyer to purchase a home that is already built. Loan programs such as VA/FHA/RD will have more requirements. All must have a certificate of occupancy if within city limits. For FHA to work on a new construction home – house needs to be less than 1 year old, will need a certificate of occupancy, 10 year builder warranty, early start letter, inspections will full compliance but for all of this a buyer can get into a new construction house for less than 10% down. For VA to work on a new construction home it must be a VA approved builder, it must be 90% complete and then an appraisal can be ordered. When timing the appraisal it is important to realize that if the property is not totally complete, the appraiser may need to revisit the property which will cost upwards of $100 extra dollars but in the busy season it may be worth it. From October – May most lenders will allow weather related hold-backs at closing such as landscaping. No hold-backs can be made for health or safety related items. General hold-back is 1.5 times the bid amount. In a long close, buyers may be required to re-document themselves with the lender before closing (i.e. income re-verification, credit check, bank statements).
Condos – Condos can be a crazy beast or a super investment. To gain financing on a condo, a lender will give a list of requirements that generally include a condo questionnaire that must be completed by the HOA contact. This asks about the condo associations budget, ownership, reserves, etc.. The budget must have 10% of annual costs in reserves and appropriate insurance deductibles. Condos with four units or less will generally require that the purchaser be an owner occupant. 5-10 units the budget and reserve must be met and not one person can own more than 10% of the units, whether it is in their personal name or an LLC. With 20 units, a fidelity bond insurance is required. FHA approval for condos is a lengthy process and must be recertified every two years. Many new condos are being built in the Gallatin Valley – 550 new condos are slated to come on the market in the next year. Other items to consider is the docs/bylaws of the HOA, what the HOA covers, renter policies, etc..
Self Employed Borrowers – For the self employed, two years of returns will be necessary. The only loan products available are conventional. An audited year to date profit and loss may be used. Having a good relationship with your CPA is super important to get the lender timely information on your taxes. Must disclose all information.