Blog: R.E. Tales
(Hey, they're not all pretty...)
I am sort of a partner for buyer and seller in trying to realize what both parties want to happen. Our success depends upon a variety of things. Your credit score is very influential, as is your equity stake (the money you will have “down” in the property). I cannot do anything to help anyone’s credit score, other than coaching – and there are professionals better qualified to do that than I am.
Your employment also counts. What you earn, how long you have been there, chances for increased pay all count. If you are self-employed, it becomes harder – I have always objected to that particular standard, not that any bank has listened. Sometimes that can work in our favor, because in a farm, you not only have a home but a place of business. Homes and businesses are not not the same and we have the two mixed together. Can we find a niche?
With a single income, that also makes it harder as you are in a bit of competition for the same funds as two income families. regardless, you will need to show a lender that, historically, you have been able to count on your income stream and that you have viable plans to make it grow. You can also try to demonstrate ways in which your expenses will be lowered – the idea is to show the bottom line will be broadening.
Lenders also make decisions by factoring in how well a borrower handles their money. Some families are better able to control expenses better than others. Eating out frequently in fancy restaurants or buying lots of new clothes (or anything else), while fun, may work against the scores of some. Also a borrower who can do their own maintenance will have better cash flow than someone who needs to hire everything done by others. These are just common examples.
Banks need a certain amount of protection to make a loan. Assuring themselves that the buyer can make the payments is part of this. the other part is the answer to the question “If we have to foreclose, can we sell the property for enough to make up what we are owed?” Hence the need for a downpayment. And that is why they have appraisals done, to make sure the property is worth more than they are lending.
Sometimes, sales are made using an artifice known as a “seller’s concession”. I don’t like them but have used them. My objection is that it seems deceitful. It really isn’t as all parties know what is going on, but it feels that way to me. It’s legal. What happens is that, having agreed upon a price, the contract is written for a higher price and the difference is called the “sellers concession”. So the seller gets what he wants in the end and the buyer gains the difference as equity or, sometimes, as money which goes for their closing expenses. This only works if an appraiser can justify the higher value on the house.
The lender’s security can come in more than one way. In addition to having money down, you could buy for less than a place is worth, the difference essentially becoming equity for the buyer. They also know that borrowers tend to hang in there tougher with “skin in the game”, meaning borrowers are less likely to just give up on making payments if things get difficult if they know just how hard they had to work to get the money to make the purchase. If it came “free”, meaning money they never owned and worked for (think: buying under market value or maybe a family gift), that doesn’t mean as much to many borrowers.
A third way to gain equity doesn’t help you in your situation as a first-time buyer. After a party has owned a place for a while, they begin to get a greater ownership stake through three things: the principal they pay with each monthly payment (which isn’t much at first), through natural appreciation (although real estate can also, and does, depreciate, over time, the trend is upwards – that’s appreciation). You also gain appreciation through capital improvements – additions, remodeling, new buildings… that sort of thing. Some remodeling is just keeping even with natural depreciation (things wearing out over time- such as a roof, for example). This sort of after-the-purchase equity gain only becomes important if you need to borrow against it for some reason. But it’’s real and you would realize it if you sold.
Loan officers are trained in making these kind of assessments. So are mortgage brokers – a good one’s help can be invaluable. A bad one leads us down rosy paths to perdition. If they are good, they will be able to coach you how to maneuver yourself into position to get that loan, even if you may not qualify right now.
Some are merely amusing, some can be an immense help. All are interesting.
After 40 years, I've learned a lot, & acquired unforgettable experiences. Follow these long enough and you'll eventually get the whole book. (Names probably changed, for obvious reasons.)