Month: July 2021

The True Cost of Waiting to Buy Real Estate

Posted on by Approved By Charles

 

One of the things I hear from clients who get frustrated with house hunting is, maybe I’ll just rent and start again next year when the market calms down. While I agree that house hunting and not getting your offers selected can be exhausting, both emotionally and physically, and demoralizing. Here’s why you should take a mental health break, albeit short, and then get on the hunt. 

Real Estate is always increasing in value. 

ALWAYS.

And the sooner you buy the sooner you will start adding that wealth to your family and not adding to someone else’s wealth. 

A Disclaimer and What we will be used for numbers: The disclaimer is that I will be using historic numbers, and historic being a 40-year moving average, for the Denver metro area. Denver does have a unique real estate market due to our climate, our three hundred plus sunny days, and our amazing outdoor, sporting, and cultural activities. Not to mention shopping, shopping, and shopping. 

For numbers I will be using a purchase price of $425,000 and that you paying $2,350 a month in rent. Also, as the sample borrower, you make $67,000 a year and have no debt other than your rent/proposed mortgage payment. 

If you wait 12 months to purchase you will have thrown $28,200 in rent towards someone else’s wealth and mortgage. 

Currently, the debt to income with this sample income and rental debt is 42.09%. 

At today’s common interest rate and putting 20% down as well as averages for property taxes and homeowners insurance gets a potential mortgage payment of $1,861 a month. In this first year of homeownership, you will pay $22,232 in total mortgage payments. Straight away you’ve saved $5,868 or $489 per month. Of these total mortgage payments, you will have paid $6,807 towards your principal loan balance. Add this to your year of savings with the lower mortgage payment and you are at estimated savings of $12,675 for the year or $1,056.25 per month towards your total long-term wealth. Of course, your new home has also appreciated in value over this time. Our forty-year appreciation average in the Denver metro is 7.25%. Over the 12 months you have owed your new $425,000 home it has appreciated by $30,812.50. 

Property Appreciation over months

In summary, in the 12 months, you have owned this home you’ve added $43,487.50 worth of wealth to your family. (Assuming, of course, you don’t spend your monthly savings). Now, you could just spend the safe $28,200 in rent or you can get your long-term wealth on track. 

Finally, and this is an important piece, your debt to income went down from 42.09% to 33.33% so they would be living much more comfortably.

Now, let’s wait 12 months and see where you would stand. 

Interest rates will probably be 1/2% higher.

The purchase price will now have increased by $30,812.50 so the new purchase price will be $455,812.50.

The required cash down will have increased from $85,000 to $91,162.50 (keeping 20% down)

On the upside your income would probably increase from $67,000 to $69,345, assuming a 3.5% rate of inflation raise. 

Your DTI on the mortgage now would be 34.92% which is higher than the 33.33% if you would have purchased last year. Your monthly mortgage went from a proposed $1,861 if you purchased last year to $2,018 this year or a difference of $157 per month more. Not a lot on a monthly basis but over 30 years that’s $56,520 more plus the $30,812.50 of equity that you lost by waiting is a difference of $87,332.50. 

 

While you may have to wait due to your specific situation, if you are waiting just because you are emotionally exhausted by looking and coming up short, you are losing out on your long-term wealth. 

Finally, and for the most depressing number of all, if you take the $30,812.50 of property appreciation and average a 7.25% equity gain over thirty years you’ve lost out on a total of $251,559 in long term wealth and increased equity. 

Add the extra twelve months of rent you paid and the additional $157 per month over the life of the mortgage and you have cost your family $336,279 in total wealth at the end of 30 years. 

The moral of the story. Don’t wait another day, if you can buy today, buy today.

 

The Mortgage Loan Process in Twenty Easy Steps

Posted on by Approved By Charles

 

The mortgage loan process is a straightforward process when you break it down into manageable pieces. So, let’s break it down into manageable pieces.
For fun and excitement, I’ve included a highly simplified graphic to follow along. (Note: The graphic is a bit simplified and doesn’t reflect every step but is meant as a summary of the process.)

Step One: Define your goals. 
Are you looking for a townhome, single-family residence, condo, acreage, ranch, duplex, or triplex? Are you looking for a place to live or an investment property or both? Do you want land or a yard for your dogs? 
Step Two: Find a Loan Originator You Trust
If your loan originator is telling you they have no fees, no closing costs, and the lowest rates, they don’t and they are lying to you. 
Step Three: Apply for A Mortgage

Most lenders have an online portal to apply for a mortgage and upload documents that are required securely. My online portal is here:

https://www.approvedbycharles.com/apply

 

Step Four: Provide Financial Docs
Generally Speaking the Documents that are required (one set for each borrower)
Photo ID (Usually a Driver’s License
30 Days of Most Recent Paystubs
60 Days of Most Recent Bank Statements
Most recent 401k/IRA/Pension or other Retirement and/or Investment account Statement(s)
Two years of Residential History
Two years of Employment history (along with contact information for all employers)
Most recent two years of W2’s and/or 1099’s
If you are self-employed, most recent two years of Tax Returns including business returns, K1’s, and/or Schedule C’s
Step Five: Have your credit Pulled
For a full pre-approval AND to close your mortgage, a hard pull on your credit is required
Step Six: Get Pre-Approved
After providing all of the required documentation and having your credit pulled your mortgage loan originator will be able to do an initial loan structuring including estimated rates and mortgage insurance costs (if any).
Step Seven: Find Your Home and Go Under Contract
Work with an amazing realtor to make your search easier and successful! Having someone legally obligated to put your interests first is critical and advised!
Step Eight: Initial Loan Estimate Sent Out (potential lock period starts)
Once you are under contract your lender has 72 hours to get out initial documents and a loan estimate. Review these documents to be completely informed about the costs and fees associated with the purchase. Make sure you sign them.
Step Nine: Deliver Earnest Money 
It is recommended to deliver earnest money by a personal check to title and if you don’t have personal checks do a wire. 
Step Ten: Property is Appraised
Your lender will order an appraisal. The appraiser will reach out to the listing agent or owner to schedule the appraisal inspection. 
Step Twelve: Appraisal is Delivered
Once the appraisal is delivered to the lender it is delivered to you as well! If the appraisal comes in below your purchase price you will need to renegotiate the contract purchase price or you will need to bring additional funds to make up the difference between the appraisal value and the purchase price; called an appraisal gap. Note: The lender can only lend on the lower of the purchase price or appraised value. 
Step Thirteen: Initial Closing Disclosure Out (loan must be locked by now)
The appraised value is usually the last piece of information the lender needs to send out the initial closing disclosures. To send out initial disclosures you must have your rate locked and the initial Closing Disclosure must be sent, received, and signed no later than three days before closing. 
Step Fourteen: Final Loan Approval
Once all information is in for the loan, the final price based on the appraisal, and the loan is locked the loan will be sent back for final loan approval. During this process, you may need to provide additional or updated docs. Be on the lookout for these requests. Any delays in getting this information back in a timely fashion may delay closing.
Step Fifteen: Clear To Close
After final approval, your loan is officially Clear to Close! Yay! Take a deep breath. The hard part is done and the lender has agreed that you are good to go!
Step Sixteen: Final Numbers Balanced with Title
After final approval, your lender will have a bit of a back and forth with the title company to settle all of the costs and fees associated with the purchase and balance everything out. Once balanced your lender will be able to get you your final cash to close.
Step Seventeen: Final Documents sent to Title for Closing
Get your signature hands limbered up. This is the home stretch!
Step Eighteen: Cash To Close Cashiers Check or Wire obtained
When you get your cash to close amount, if any, you will need to get this ready. If you are wiring in these funds your lender will securely send you a wiring instructions document. Make sure you call the number on the document to verify the wiring instructions. If you want to do a cashier’s check make sure you aren’t over the title company’s limit for a cashier’s check. Additionally, both the wire and cashier’s check MUST be drawn from one of your previously disclosed accounts. If you do otherwise it will delay closing and additional documentation will be required. If you are getting gift funds make sure you verify the process with your lender. Different loan types have different requirements and attempting to do something outside of the rules may delay closing and require additional documentation.
Step Nineteen: Go to Closing and Sign a LOT of Documents
And keep the pen! Title companies have the best pens!
Step Twenty: Funding Approved and You Own a Home!
After you sign everything your lender may require a review of the signed and provided documents. This may take a bit of time as the title company has to verify, scan and send the documents to the lender securely for review. Once reviewed the title company will get the thumbs up that funding is approved and CONGRATULATIONS you now own a home!
This is a long and complicated process but a good realtor and lender team will make this process go by very quickly and smoothly. After all, you are asking the lender to give you, possibly, hundreds of thousands of dollars. It is important to begrudge them their due diligence. They want to make sure their investment in you is a good investment. Finally, and this is very important, lenders do NOT invest in real estate, you are doing that. They are investing in you!