Archive for May 28, 2013

What is the Mortgage Credit Certificate?

          

What is the Mortgage Credit Certificate?  The Mortgage Credit Certificate (MCC) is a dollar for dollar tax credit for first time home buyers.  The credit relates to the mortgage interest paid on a homeowner’s property over the life of their loan, as long as it remains owner occupied.

How does this differ from the standard interest deduction?  The first 20% of interest you pay on your mortgage will come back to you in a dollar for dollar tax credit.  The remaining 80% of interest paid will still be used to write down your income on your taxes as it normally does with owner occupied properties.

Can you give me an example?  Let’s pretend the Johnsons are first time home buyers and purchase their first home for $275,000.  We’ll also assume they will utilized FHA financing with a down payment of 3.5%, a fixed interest rate of 3.75%, and are in a 20% tax bracket.

Year #1…Total interest paid = $10,040.95
Annual property taxes = $2,750
Mortgage insurance paid = $3,375.24
Total paid in = $16,166.19
Annual tax savings = $3,233.24 or $269.44/mo

Annual refund with MCC = $5,819.83 or $484.99/mo

Does the MCC last for the life of my loan?  The MCC does last for the life of your loan as long as you’re occupying the property.  However, keep in mind that as time progresses, though your monthly mortgage payment may stay the same, more of your payment will go towards principle.  Therefore, your tax savings will slowly decrease because you are paying less and less interest every year.

The MCC sounds like a no brainer for first time home buyers!  The MCC is a fantastic program, but there are parameters you have to meet, as well as repercussions if you stop occupying the property.  Don’t make a decision without getting educated first!  If you’d like to learn more about the MCC go to our Calendar/Reservations page and sign up for our FREE First Time Home Buyer/Down Payment Assistance workshop.

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Appraisal Timelines

          

What’s an appraisal?  An appraisal is a separate 3rd party valuation of the subject property.  It is required by all lenders and is generally paid for by the buyer.  It usually ranges from $500-700 depending on the situation.

What’s the timeline for an appraisal?  It can take a couple days to a couple weeks to complete.  It really depends on the appraiser that’s assigned to your file, so you’ll want to make sure you have plenty of time to complete the appraisal way before your closing date.  This is because the appraisal has to be included in your file before it is submitted to underwriting.

At what point in time is the appraisal ordered?  Some first time home buyers may want to wait until AFTER the inspection is complete to order the appraisal.  However, due to the aforementioned timeline, if you want to take this approach you will usually want to ask for a 45 day close from the seller.  But depending on your competition you may not be afforded that luxury.

What if I can’t get a 45 day close?  If this is the case, you will either have to order your appraisal immediately after getting under contract, or pay extra to have the appraisal rushed.  Or maybe even both, depending on how long you have to close.  Regardless of the situation, the most important thing is that your Realtor and lender are communicating and on the same page so that everyone has realistic expectations.  The last thing you want to do is miss your close date do to a miscommunication.

Don’t make the biggest decision of your life without getting educated!  If you would like more information on transaction timelines or the home buying process in general, please go to our Calendar/Reservations page and sign up for one of our FREE First Time Home Buyer/Down Payment Assistance workshops.

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Am I Preapproved for a Purchase Price or a Payment?

          

Am I preapproved for a purchase price or a payment?  When purchasing a home, you should get preapproved for your loan with a qualified loan originator.  This loan originator will look at your documentable income and preapprove you for a PAYMENT based on underwriting guidelines.

So why does the preapproval letter always state a purchase price?  The lender ESTIMATES roughly what purchase price amount you might qualify for based on your allowable monthly mortgage payment.  They have to estimate this purchase price amount because property taxes and homeowners insurance premiums which both go into your monthly payment will vary on different properties.  Interest rates also fluctuate on a daily basis and the lender can’t lock in your rate until you’re under contract.

So if I’m approved for a payment, how does my Realtor know how much I can afford?  Your Realtor should be in close contact with your loan originator.  Before they write up an offer for you, they should give your loan originator the property taxes for the specific home you’re interested in so the loan originator can calculate a payment for you.

What happens if my Realtor doesn’t check with the lender before writing the offer?  You will most likely be able to retrieve your earnest money, however you will probably be out a lot of money for your inspection fee and appraisal fee.  It’s much better to make sure you’re using a Realtor and loan originator that are comfortable communicating with one another, and understand the importance of payment amount over purchase price.

Don’t make the biggest financial decision of your life without getting educated!  If you’d like to know more about the preapproval process or the home buying process in general, please go to our Calendar/Reservations page and register for one of our FREE First Time Home Buyer/Down Payment Assistance workshops.

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Is Cash Really King?

Is cash really king in the Seattle real estate market?  Yes, cash has been fairly dominate in the Seattle real estate market for at least 12 months now.  We’ve especially seen a strong presence of cash buyers in the entry level first time home buyer market in the surrounding area, representing anywhere from 50-75% of the overall buyer pool depending on demographic.

How are first time home buyers paying all cash?  It’s more likely that this make up is comprised of institutional, small time and foreign investors.  Also, we have seen many situations where a first time home buyer’s parents may give them a loan to buy their first home and charge them a standard market 4% interest rate, as it gives them a much better return than say leaving the money invested in CD’s or the bond market.

How does this affect first time home buyers?  Competition is already stiff in the Seattle real estate market due to an influx of buyers and very few homes for sale on the market.  Cash buyers are generally given preference by sellers because this type of buyer can close very quickly, generally doesn’t require an appraisal or inspection, and doesn’t have to worry about meeting underwriting guidelines to receive a loan.  So it can be very difficult for first time home buyers to compete in this arena.

Is there any way first time home buyers can compete with cash buyers?  Yes, but it can be tricky.  First time home buyers can employ many different strategies including; conducting a pre-inspection, waiving their financing contingency, using an escalator clause, offering more earnest money, and much more.  However, it is important to understand before using any of these strategies, that they each come with pros and cons.

Don’t make the biggest financial decision of your life without getting educated!  If you’d like to find out more about competing with cash buyers or about the home buying process in general, please go to our Calendar/Reservations page and sign up for one of our FREE First Time Home Buyer/Down Payment Assistance workshops.

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