Removing or Adding a Person to a Loan

In divorce situations, it is common, for the spouse who keeps the home to refinance to remove the other spouse from the loan.  Equally as common, first-time buyers who don't have enough income to qualify may ask a parent to co-sign and must add their name to the mortgage.

Another situation that requires removing or adding a person to a loan could be to qualify for a better interest rate.  The difference in a minimally acceptable credit score and something that might be considered "good" could be as much as a 0.5% higher rate for the term of the mortgage.

Consider that a couple is buying a home on a conventional loan, and they have individual credit scores of 760 and 670.  The underwriters will price the loan based on the lower of the two scores.  A half percent interest on a $400,000 30-year mortgage could have close to $110 a month difference.

A possible solution to this dilemma could be available, assuming the borrower with the higher credit score had enough income to qualify for the mortgage separately.  If so, that person would be eligible for the lower rate.

The property could still be titled in both names and if so, that person would be liable for the mortgage should the named borrower default on the loan.

Another scenario that may arise is that a couple has enough income to qualify for a mortgage but because one of the parties has a lower credit score, it will be priced higher.  Having a parent or relative added to the mortgage as a non-occupying borrower to help with the credit score.  Interest rates are determined on the lowest middle of three scores for the borrowers applying for the loan.

Assuming the parent's score was higher than the lower score of the couple, it could improve the rate applied to the mortgage loan.

The value of a trusted mortgage professional is very important.  They can offer alternatives to situations that could be worth tens of thousands of dollars over the life of the mortgage and in some cases, can make the difference in being approved at all.

Your real estate professional would be more than willing to make a recommendation and can support the need to assemble a strong team to help with your transaction.

Keep Your Current Home as a Rental

Let's assume that you have owned your home for several years.  It has increased in value and the unpaid balance considerably less than you originally borrowed.  In short, you have equity in the home.  You're thinking about buying another home and one of the questions going through your mind is "should we find a replacement property before we put our home on the market?

It is a good question but maybe there is another one you should be asking.  "Should we keep our current home and convert it to a rental when we buy another home?  The answer to the question may have a great deal to do with your finances but if you can afford it, it may end up being one of the better investments you have made.

Do you have enough discretionary funds for a down payment and closing costs for your new home?  Is it enough to put 20% down payment so you can avoid paying mortgage insurance?  Can you qualify for the mortgage on the new home with the additional liability of your current home?

You don't even need "yes" answers to all of these to be considering the possibility of converting your home to a rental.  If you have sufficient equity, you may be able to pull part of it out for your down payment and closing costs and still have equity available for other needs.  Lenders will usually make cash out refinances up to 80% of the value of the home.

Another possibility may be to borrow against your qualified retirement program.  The advantages include speed and convenience (it is your money), repayment flexibility, and cost advantage.  If you believe the stock market is moving toward a down position, this could be additional incentive to earn more in the rental.

What makes rental properties so attractive right now is that rents are rising and expected to continue because the factors that make a shortage of homes for sale are the same that make the shortage of homes for rent.  The rent collected, less the mortgage payments and expenses will probably result in a positive cash flow before tax.  The other major factor is that homes are appreciating at a very high rate. 

Using borrowed funds to control an appreciating asset is leverage and it can dramatically affect the rate of return an investor enjoys.  The dynamics of income, appreciation and favorable tax benefits makes rental real estate very appealing.

Your real estate professional can provide information on the value of your current home, estimates for rental income and expenses and in finding your replacement home.  Talk with your tax advisor to see how this alternative would work for you. 

The good news if you choose this opportunity is you will not have to put your home on the market and timing of your new purchase became greatly simplified.  It may even be to your advantage to be flexible with the seller's occupancy which could be a big advantage if you are negotiating against multiple offers.

For more information, download the Rental Income Properties and talk to your real estate professional.

Cash-Out Refinance

With the rapid appreciation that homes have had in the last two years, most homeowners have equity.  A common way to release part of the equity is to cash-out refinance but some homeowners may not be eligible currently.

This type of loan replaces the current mortgage by paying it off and an additional amount of cash for the owner.  Generally, lenders will consider a new mortgage up to a total of 80% of the current value.

Typically, the rate on a cash-out refinance will be slightly higher than a traditional purchase money mortgage.  As is in any lending situation, the rate depends on the borrower's credit and income.  The best interest rates are available to borrowers with higher credit scores, usually over 740.

Loan-to-value can affect the rate a borrower pays also.  A 70% loan-to-value mortgage could be expected to have a lower interest rate than an 80% LTV because there is a larger amount of equity remaining in the property and therefore, less risk for the lender.

There are no restrictions on how the owner can use the money.  It can be used for home improvements, consolidating debt, other consumer needs or for investment.

Eligibility Requirements as found in FNMA Selling Guide B2-1.3-03 Cash-Out Refinance Transactions

"Cash-out refinance transactions must meet the following requirements:

• The transaction must be used to pay off existing mortgages by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it.
• Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan.
• The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
  • There is no waiting period if the lender documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).
  • The delayed financing requirements are met. See Delayed Financing Exception below.
  • If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower's six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See B 2-2-01, General Borrower Eligibility Requirements (07/28/2015) for additional details.)
  • If the property was owned prior to closing by an inter-vivos revocable trust, the time held by the trust may be counted towards meeting the borrower's six-month ownership requirement if the borrower is the primary beneficiary of the trust.
• For DU loan case files, if the DTI ratio exceeds 45%, six months reserves is required."

Encouraging Multiple Offers

Based on the current competition due to lower than normal inventories, it is possible for a seller to find themselves on the beneficiary side of a multiple offers.  Two or more parties may be trying to buy your home at the same time and because of the competition, they increase the purchase price, possibly, remove unnecessary contingencies and try to make their offer as attractive as possible.

This can pleasantly result in you realizing higher-than-expected sales price and proceeds of sale.  While it may not materialize, it is good to understand what could happen and the best way to handle it.  Your real estate professional is positioned to offer you specific advice but the following are some things to consider.

One tactic is to delay showings for a short period of time.  Some agents will create this by putting a sign on the property with a rider that indicates "coming soon" and depending on the local MLS rules, it may even be put in the system.  No showings will be allowed until a publicized date, usually, a few days, at which time, the goal is to have prospective buyers standing in line to see the home.

This might even be combined with an open house scheduled for the initial showings.  Agents using this method have sometimes found lines of people waiting outside the home to see it first.

When multiple offers are made, invariably, there will be some disappointed people and for that reason, it is essential to follow a strict procedure to see that no one is given an advantage over other buyers.  Discuss the following suggestions with your professional:

• All offers are countered by asking the buyer to make their "best and final" offer which will include not only price but terms also.
• The seller may authorize the listing agent to disclose that there are multiple offers.  (Article 1, Standard of Practice 15 of the National Association of REALTORS® code of ethics.
• Discuss with your professional their thoughts on revealing information, like price and terms, on other offers you are considering.  In most cases, they are allowed to do so with your permission, and it may make a difference in the negotiations.
• If one offer is substantially better than the other offers, the seller can accept or counter-offer.
• Have your real estate professional advise you of countering more than one offer which could result in contracting to sell your home to more than one person.  They can advise you alternative ways to do this.

Keep this in mind.  Sometimes, the highest offer is not the best offer.  Even though the buyer is willing to pay a high price for your home and possibly, willing to remove the financing condition, if they are going to get financing and it doesn't appraise, it can cause issues. 

Have your real estate professional tell you about asking for proof of funds from a cash buyer or confirming their ability to pay above appraised value.

Your real estate professional can help you realize the most out of your home.