In the search for funds to close, there is an oft-overlooked source that could be right under your nose — or at least somewhere safely tucked away inside your closet. How about that 1952 Mickey Mantle rookie baseball card? Sound silly? It’s not. That baseball card has real value and can be readily sold to a collector.
But what if you did not want to part with your card or your prized PEZ collection? Could you access the equity in such items in order to buy a home? You bet you could. Be it an antique, a piece of artwork, car, collectable or any other asset.
The principle in such a transaction applies to any asset that can be independently appraised by a third party. To make this work, you need to be careful in both documenting the value of the asset as well as documenting the funds received should you sell it. For example, let’s say you have a first edition autographed copy of In Cold Blood by Truman Capote that’s worth $2,000. You would first have the book appraised by an expert. Keeping a copy of the appraisal, you could then sell the book and document the sale with a copy of the receipt and deposit the money into your bank account. Or, you could also borrow against the value of the book.
Lenders will allow for a secured loan to be counted as legitimate funds available for closing, as long as the terms on the loan are figured into your debt ratios. That way you won’t have to part with your beloved 1952 Mickey Mantle rookie baseball card or your copy of the Capote book. You can borrow against these — as long as you can find a lender willing to give you the loan. Collectables such as baseball cards, while valuable, are much less commonly used as assets than automobiles. But they can be just as fruitful.
So, if the lender can independently obtain a legitimate value assessment of the asset that matches up with the appraisal, then you potentially have another tool to help you fund your home purchase.
Financing Solutions with David Reed
Monday, June 23, 2008
Monday, June 16, 2008
Rates Creep Up
A recent survey and a rate increase could mean more competition for homes
Recent indication is that first time home buyers are getting tired of sitting on the sidelines. According to a recent online poll taken by the National Apartment Association, 17 percent of renters plan to make the jump to home ownership in the next year; 41 percent of the 2,041 respondents planned to be home owners within two years. Only 31 percent planned to still be paying rent five years from now.
Another factor that could very soon contribute to an increase in home buying could be rising mortgage costs. Fixed-rate mortgage rates rose to 6.32 percent, the highest it has been since October. After months of aggressively dropping interest rates, many lenders are worried that the Fed will be forced to raise rates back up. As interest rates rise, so do mortgage rates. According to a press release on freddiemac.com, Frank Nothaft, Freddie Mac vice president and chief economist said that, "Mortgage rates jumped this week after a number of Federal Reserve officials, most notably Chairman [Ben] Bernanke and Vice Chair [Donald] Kohn, expressed concern over a threat of inflation." We may very well be seeing the beginning of the end of the super-low mortgage and potential buyers may realize that with rising rates, now may be the time to jump in. Nothaft added, "Moreover, pending home sales for April unexpectedly rose by 6.3% and mortgage applications for home purchases ... were also up last week."
Recent indication is that first time home buyers are getting tired of sitting on the sidelines. According to a recent online poll taken by the National Apartment Association, 17 percent of renters plan to make the jump to home ownership in the next year; 41 percent of the 2,041 respondents planned to be home owners within two years. Only 31 percent planned to still be paying rent five years from now.
Another factor that could very soon contribute to an increase in home buying could be rising mortgage costs. Fixed-rate mortgage rates rose to 6.32 percent, the highest it has been since October. After months of aggressively dropping interest rates, many lenders are worried that the Fed will be forced to raise rates back up. As interest rates rise, so do mortgage rates. According to a press release on freddiemac.com, Frank Nothaft, Freddie Mac vice president and chief economist said that, "Mortgage rates jumped this week after a number of Federal Reserve officials, most notably Chairman [Ben] Bernanke and Vice Chair [Donald] Kohn, expressed concern over a threat of inflation." We may very well be seeing the beginning of the end of the super-low mortgage and potential buyers may realize that with rising rates, now may be the time to jump in. Nothaft added, "Moreover, pending home sales for April unexpectedly rose by 6.3% and mortgage applications for home purchases ... were also up last week."
Using Rental Income to Help Qualify
There are times when the perfect home unexpectedly comes on the market … at the wrong time. The potential buyers are unprepared for the new listing, and if they don’t act fast their “perfect home” will be snatched up by someone else. However, with some creative financing on their side, they can nab the home of their dreams without the added pressure of another mortgage.
One of the biggest obstacles that buyers can face is having to qualify for a second mortgage while still paying their current mortgage. For example, if potential buyers have a current payment of $2,000 and their new home will require an additional $2,500 payment, then they will likely struggle to afford the new property. Still other buyers find a new property but don’t want to sell their current home. Maybe the market isn’t as good as they’d like and they don’t want to sell now, or perhaps it’s a wealth-building strategy to keep the asset in the family. Whatever their reasons, buyers can offset the second mortgage with a new renter—but only under certain circumstances.
Lenders can only allow rental income to be used to offset the old mortgage—they cannot use the rent from the new tenant as “income” to help qualify for the new (or second) mortgage. It sounds odd, but here’s how it works.
The renter must sign a minimum 12-month lease, provide a copy of a cancelled rent deposit check made out to the client and pay current market rent for the area. Current market rent is established independently using a third-party appraiser to perform a “rent survey.” Ultimately, it is this number – current market rent – that the lender will use as rental income, regardless of what the lease agreement says.
If the rent survey says that market rents are $2,800, then that’s the initial rent number the lender will use to help qualify the buyer for the new home. Next is what’s called the “vacancy factor,” which immediately reduces the market rent to 75 percent of its value. In this example, the $2,800 would be reduced to $2,100 for qualification purposes.
If the old principal, interest, tax and insurance payment (PITI) is $2,000, then the lender subtracts that $2,000 from the reduced market rent of $2,100 and gets $100. Now, the old mortgage has been offset by the adjusted market rent and the buyer can qualify for the new mortgage. It’s important to note that lenders won’t apply the net rental income ($100) to help buyers qualify. Seasoned landlords, or owners of real estate that collect rent from various tenants use a different method to calculate income and it’s taken from their tax returns.
But for the potential buyers who find a property and can’t qualify for two mortgages, this is an excellent method if followed correctly.
From Financing Solutions with David Reed
One of the biggest obstacles that buyers can face is having to qualify for a second mortgage while still paying their current mortgage. For example, if potential buyers have a current payment of $2,000 and their new home will require an additional $2,500 payment, then they will likely struggle to afford the new property. Still other buyers find a new property but don’t want to sell their current home. Maybe the market isn’t as good as they’d like and they don’t want to sell now, or perhaps it’s a wealth-building strategy to keep the asset in the family. Whatever their reasons, buyers can offset the second mortgage with a new renter—but only under certain circumstances.
Lenders can only allow rental income to be used to offset the old mortgage—they cannot use the rent from the new tenant as “income” to help qualify for the new (or second) mortgage. It sounds odd, but here’s how it works.
The renter must sign a minimum 12-month lease, provide a copy of a cancelled rent deposit check made out to the client and pay current market rent for the area. Current market rent is established independently using a third-party appraiser to perform a “rent survey.” Ultimately, it is this number – current market rent – that the lender will use as rental income, regardless of what the lease agreement says.
If the rent survey says that market rents are $2,800, then that’s the initial rent number the lender will use to help qualify the buyer for the new home. Next is what’s called the “vacancy factor,” which immediately reduces the market rent to 75 percent of its value. In this example, the $2,800 would be reduced to $2,100 for qualification purposes.
If the old principal, interest, tax and insurance payment (PITI) is $2,000, then the lender subtracts that $2,000 from the reduced market rent of $2,100 and gets $100. Now, the old mortgage has been offset by the adjusted market rent and the buyer can qualify for the new mortgage. It’s important to note that lenders won’t apply the net rental income ($100) to help buyers qualify. Seasoned landlords, or owners of real estate that collect rent from various tenants use a different method to calculate income and it’s taken from their tax returns.
But for the potential buyers who find a property and can’t qualify for two mortgages, this is an excellent method if followed correctly.
From Financing Solutions with David Reed
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