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March
11

FHA Appraisals Explained

FHA Appraisals Explained

One of the most common questions I receive wearing both the appraiser and broker hats in real estate is: will this house pass the appraisal for FHA lending?

To provide some context the FHA (Federal Housing Administration) loan is offered by FHA approved lenders and are insured by FHA.  This minimizes the risk for the lender.  In order to offer this insurance FHA has an entire handbook (Handbook 4000.1) of guidelines that must be met with standards for the borrower(s) and the property being purchased.  In order to minimize risk FHA's standards are set to ensure that the properties FHA is insuring meet certain safety and condition elements.

The role of the appraiser is to be the eyes, analyze and report defective conditions and provide photo documentation of the interior and exterior condition of the property to the lender. 

House

Key takeaway that is hard to understand.  The borrower pays up front for the appraisal in most cases.  Yet, the client on the appraisal is the lender and by the Uniform Standards of Professional Appraisal Practice and its confidentiality rule:  the only communication the appraiser can have is with the client on the report.  If that information seems difficult to grasp, it is for most folks who pay for a service.  In this case it does work in the favor of the consumer.  It ensures that the appraisal will a non-partisan opinion of value and the results will be confidential.  Both of which benefit the consumer.

FHA has minimum property requirements and standards that the property must meet in order to be eligible for an FHA insured loan.

FHA requirements begin with legal use. The property's zoning must be reported and the property must comply with all zoning ordinances.

The appraiser must report on any encroachments that might affect the property.  That is, any intrusion on the real estate being used for collateral in any way physically.  Easements and deed restrictions must be reported on as well if they would affect use, value or marketability in any way.

The appraiser is asked to comment on any externalities.  Any heavy traffic, airport noise, overhead power lines or anything else outside the property boundaries that would affect use, value or marketability of the property.

The appraiser will be asked to verify the access to the property is an all-weather road surface over which typical passenger and emergency vehicles could traverse regardless of the weather conditions.  The appraiser must also describe the access, either private or public and make note of the condition of the access.

The appraiser must note onsite hazards or nuisances and conditions that could endanger the health and safety of the occupants or affect marketability going forward.

These health and safety standards include looking at the grading to make sure there is no standing water around the foundation or in the crawlspace or basement and that positive drainage away from the structure is being achieved.  The appraiser is to look for the existence of sinkholes, slush pits, underground storage tanks or other environmental hazards on the property.  The appraiser will research and report on the location of the property and identify if it is in a Special Flood Hazard Area. 

Inside the home there are many more requirements to ensure the health and safety of the occupants in the future.  The appraiser is to make a thorough inspection of the home including a head and shoulders inspection of the attic and crawlspace or walk through of the basement to see all readily observable conditions.  If there are any mechanical systems in the basement the crawlspace is to be at least 18" in height to accommodate maintenance on those systems.   

well 

The appraiser will research and report on there being a safe and potable water source with sufficient pressure and available hot water working to be of use for residential dwelling.  Every living unit must have one bathroom with at least a toilet, shower and water closet with safe method of sewage disposal.  The appraiser must operate the toilets and water faucets to discover function and the presence of leaks. 

Electricity sufficient to support lighting, cooking, and mechanical equipment used in the living area.  The appraiser is to test a representative number of outlets in each room to make sure the electric is safely operating.  The appraiser is also to test the light switches.  The electrical system is evaluated for the presence of frayed or exposed wiring. 

If the home was built prior to 1978 there is to be no chipping or peeling paint either on the interior or exterior of the building or any detached outbuilding.  The presence chipping or peeling paint in a home built before 1978 will require correction.

Bedrooms are to have a form of ingress and egress in case of an emergency. 

foundation

The foundation is inspected and commented on to make sure it is not subject to a foundation issue or termite infestation.  Appliances must be operational.  The condition of the plumbing, electrical and heating systems is to be noted.  Central air is not a requirement.  The mechanical systems are to be identified as safe to operate and have a reasonable future utility.  The roof is to be observed and must have at least 2 more years of useful life left. 

When any of these minimum property requirements or minimum property standards are not met the appraiser will make report of the necessary repairs to bring the property into compliance.  The buyers, sellers and their respective brokers will work through the negotiations and logistics of coming to compliance.  The appraiser will then come back out to do a final inspection to verify that the work is complete and compliance is achieved. 

basement

Another question I get frequently is from sellers is: "why can't we include my finished basement in the total finished square footage".  My typical answer is that the market aka me responds to finished basement differently than above grade square footage.  For instance:  we have a basement bedroom at my family's lakehouse.  When the spare bedroom upstairs is not being used where do you think you will find me?  Upstairs every time there is an opportunity above grade.

The FHA Handbook also lays out the process for measuring and reporting Gross Living Area (GLA) in a dwelling unit.

Gross Living Area
     Definition - "Gross Living Area (GLA) refers to the total area of finished, above-grade residential space calculated by measuring the outside perimeter of the Structure.  It includes only finished, habitable, above-grade living space."

"When any part of a finished level is below grade, the Appraiser must report all of that level as below-grade finished area, and report that space on a different line in the appraisal report, unless the market considers it to be Partially Below-Grade Habitable Space."

It is required that specifically finished basements, and unfinished attic areas are not included in the total GLA. The FHA Handbook calls for the appraiser to treat Modular Housing the same as stick-built housing including using the same form for reporting of both products.

FHA will ensure homes with an Accessory Dwelling Unit (ADU), a cistern, a spring or several other anomalies under certain conditions.  They must be legal uses and typically the appraiser must be able to provide at least one comparable sale in the market with that characteristic to prove the marketability of those characteristics in the local market.

When you list these requirements out it seems that these requirements cover the gamut of what the prudent buyer would ask in the way of questions or the process of discovery a typical buyer would follow to purchase a property.  The purchase is an investment, as is the offering of an FHA insured loan.  These steps are in place to manage the risk of the lender and also to protect the consumer in the process. 

January
27

5 Reasons You Were Denied a Mortgage Loan--And How to Fix Them

Buy a House Home Loan Approval
Getting denied for a mortgage loan may put a temporary halt to your dream of buying a house, but it doesn't have to be permanent. When you find out why your loan application was denied, you can correct any issues and reapply. Here are five common reasons your loan application can be denied as well as suggestions from our REALTORS® on how to fix them:

  1. Check your credit score.
    Your credit score is based on your credit history and is supposed to represent your creditworthiness. If you've failed to make payments or have made them late, you may have a credit score that's too low to qualify for a mortgage loan.

    What to do: Check your credit reports to make sure they don't contain any errors, and if they do, work with the credit reporting agency to correct them. If you've been denied a mortgage loan because of accurate information, start making all your bill and loan payments on time, every time. Also, you can check with a different lender.

  2. You don't have enough money for a down payment and closing costs.
    You'll need to make a down payment as a condition of most mortgage loans. In addition, you'll need to be able to pay closing costs, which are fees that are due at the closing of a real estate transaction. The down payment and closing costs can't be included in the mortgage loan, so if you don't have the money to pay them, you may be turned down.

    What to do: A relative may be willing to give you money for a down payment as a gift. You can also ask the seller to pay some of the closing costs.

  3. You have too much debt compared to your income.
    Your mortgage lender will look at your debt-to-income ratio, which calculates how much of your monthly income goes to debt payments. If your lender thinks you won't be able to cover the monthly mortgage payment in addition to your debts, you may not be able to get a mortgage loan.

    What to do: Pay down more of your debt and also avoid taking on any more debt. You can also try to reduce the interest rate on some of your debt by, for example, transferring your credit card balance to one with a lower interest rate.

  4. You recently changed jobs.
    Lenders prefer it if borrowers have held their current jobs for at least two years. This represents stable employment and gives the lender confidence that your income will allow you to make your mortgage payments. If you've recently changed jobs, a lender may deny your mortgage application.

    What to do: Ask your employer to provide documentation such as your job offer letter or contract and several pay stubs.

  5. Your home appraisal is too low.
    A condition of your mortgage approval will be an appraisal of the property. If the appraisal is higher or in line with the purchase price, you won't have any trouble. But if it's lower, your mortgage loan application may be denied.

    What to do: Try to get the seller to accept a lower price, or pay the difference between the appraisal and the purchase price in cash.

Buy a House with Old Dominion Realty
Contact us today to find out more about how to qualify for a mortgage loan, even if you've been previously denied. We're very familiar with the mortgage loan process and can suggest lenders that have helped others buy Harrisonburg homes for sale.

December
2

How Early Is Too Early for Home Loan Pre-Approval?

Home Loan Pre-Approval
When it comes to buying a home, the process can seem quite overwhelming — especially if you're a first-time home buyer investigating finance options. If you're like many prospective home buyers, you'll be working with a mortgage lender to secure a rate that works well with your budget and lifestyle. Our REALTORS® recommend that most prospective homeowners get pre-approved for a loan before they put an offer in on a home.

Everything You Need to Know About Mortgage Pre-Approvals

When searching for Harrisonburg homes for sale, you should already have an approximate budget in mind. This range can be frugal, sliding only by $10,000 to $20,000, or it can be a little more flexible by stretching between $25,000 to $50,000. Once you've determined this amount, you'll be ready to enlist the help of a mortgage lender through your preferred financial institution.

When you make an offer on a home, you'll need to either show that you're pre-approved for a mortgage or you'll need to secure financing from a lender in order to move forward with the sale. Although you can wait until after you've made an offer on a home, we recommend that you get a mortgage pre-approval first. A pre-approval involves a bank or broker examining your loan application to determine if you'll qualify for your desired mortgage. This is based on factors like:

  • Employment History
  • Income
  • Debt-to-Credit Ratio
  • Credit Score

One reason we recommend a pre-approval is because some lenders may offer you less than what you need depending on those factors. If you're pre-approved without issue, this gives the home seller reassurance that you're serious about your offer.

However, your pre-approval won't exist indefinitely. In fact, there is a shelf life for all mortgage pre-approvals, albeit one that takes into account that real estate transactions aren't finalized overnight. How long do pre-approvals last? Unfortunately, there is no single set duration that your pre-approval will be valid for, but a 90-180 day time period is common in the real estate industry.

Three months can fly by in the blink of an eye, especially if you're searching for a home in a hot market — which means you don't want to secure a pre-approval too early. Of course, you could find the home of your dreams next month and need an immediate loan approval so you also can't wait too long into your search. When is the best time to get pre-approved? We recommend that you first get prequalified with your lender when you're ready to begin your home search. Pre-qualification isn't as set in stone as a pre-approval, but it allows a lender to assess your finances and tell you how much you will likely be approved for based on your current finances. This will provide you with an idea of where your financial position sits in the eyes of a lender.

If your pre-qualification is sufficient and doesn't require you to raise your credit score or decrease your debt, we then suggest that you identify the neighborhood and specific home features you desire. Knowing the price range, location and must-haves will help you narrow your focus to specific homes. Now that you know exactly what you're looking for, you're in a great position to seek pre-approval for a loan and continue your search.

Would you like assistance with your pre-approval and homebuying process? Contact us today to get started!

Get Started Buying a Home

April
15

What Determines Your Interest Rate

Home Interest Rate

Before you start shopping for the right house, you have to shop for something else: the right mortgage. Pre-approval is practically mandatory if you want sellers to consider your offers, and comparing different rates and terms is just as important as comparing different properties. Because your rate will determine the size of your monthly payments for decades to come, you want to choose a loan with as little interest as possible. But do you know how lenders come up with this important number in the first place?

Many different factors and figures affect your interest rate, and you can't predict or control all of them. Our real estate agents want you to understand your fluctuating options when you know more about the math behind them. Here are some of the things banks and other lenders consider as they calculate interest rates for home loans:

Economic Trends (Supply and Demand)

Interest rates get higher when lenders take on additional risks, and some risks have nothing to do you with you. For example, are you buying a home in an unstable financial climate? Housing markets suffer, and layoffs are more likely during economic slumps, so lenders must take local and national trends into account as they consider their risks. That's why lenders usually follow the Federal Reserve's lead, lowering or raising interest rates as the federal rate changes.

Lenders also depend on a secondary market of bundled mortgage bonds, so their rates are influenced by the investors who will purchase your loan from them. These investors want high yields on the investments they make, and the laws of supply and demand apply to mortgage bonds too. Your lender wants a loan that will be profitable enough to attract investors, so they must take investors' risks into account.

Your Credit History and Amount of Debt  

How likely are you to make every mortgage payment on time, in full? Lenders only charge their prime rates (their lowest current rates) to borrowers with fantastic track records. That means your credit score and credit history will play a huge role in the rate you receive. Late or missed payments will make your rate soar, while a history of on-time payments will make lenders feel better about their risks. If you have an established relationship with your lender, that may boost your reliability too.

Of course, you also need the funds to make those payments. Debt-to-income ratio is just as important as your salary because it determines your available income every month. If you have a lot of outstanding debt, you're a bigger risk to lenders, even if your credit score is stellar.   

Price, Age, and Location of the Property

Already have an interest rate from a bank? Until you make an offer on a specific home, that number may not matter much. Lenders calculate a new rate for every loan, and yours will be affected by the value of the home you want to buy. For example, lenders look up historical data of similar houses in the area, considering the market value and recent selling trends. They may even offer different products for different types of structures or neighborhoods.  

Of course, the price of your house plays a big role too. While your down payment and closing costs will also affect the size of the loan, you should usually expect higher interest rates for homes with higher prices.

Are you ready to buy a house? At Old Dominion Realty, our real estate agents are happy to make this process as easy (and easy to understand) as possible, from mortgage pre-approval to closing day walkthroughs. Contact us to find an experienced agent near you.   

January
21

Buying a Home in Augusta? Here's How to Apply for a Mortgage

Mortgage Application Tips
Do the words "mortgage application" send a chill up and down your spine? It's an understandable reaction, considering the financial and emotional investment that goes into the purchase of a home in Augusta County.

Fortunately, applying for a mortgage doesn't have to be so stress-inducing. Preparation is the key, as our real estate agents share their top tips that pave the way to a streamlined mortgage application process.

  1. Polish Your Credit Score
    Mortgage lenders have a lot to lose on bad decisions, and your credit score is the best indicator they have regarding your financial responsibility. Request free copies of your credit reports from all three major agencies and clean up any inaccuracies.  Credit utilization ratio accounts for one-third of your total score, so devise a plan to pay down open balances as soon as possible.

  2. Know Your Limit
    If you fall in love with a house that's beyond your means, emotion may fool you into believing you can come up with the extra money. But reality hits hard and fast, and you might find yourself sinking under the weight of monthly payments. The industry standard is the 28/36 rule, which dictates that housing costs should be no more than 28 percent of gross monthly income while total debt payment should not exceed 36 percent.

  3. Determine a Down Payment Amount
    While it can be difficult to come up with ready cash for a sizable down payment, the advantages are worth it. Monthly payments will be lower, especially if you put enough down to avoid private mortgage insurance (PMI).  In addition, the smaller the down payment, the more vulnerable home equity is to sudden changes in real estate values.

  4. Research Options
    The good news AND the bad news is that there's no shortage of lenders, types of mortgages and rates. Fixed or adjustable rate? 15-year or 30-year? Government-backed or conventional? First-time home buyer program? It means putting in some serious study time, but there's enough variety to offer solutions for nearly every home buyer's individual situation.

  5. Collect Documents 
    There may be slight variations, but here's a list of the principal documents required by most lenders:

    - Recent paycheck stubs and bank statements
    - Last year's tax returns, including your most recent W2
    - Rent history, if applicable
    - A complete list of assets and debts
    - Divorce decree and bankruptcy discharge papers, if applicable

    If you're self-employed, documents such as tax returns, 1099 forms, and profit-and-loss statement can serve as proof of income.

  6. Get Pre-Approved
    While pre-approval doesn't guarantee a mortgage, it indicates that a lender has reviewed your qualifications and found that you meet their standards for a loan. A pre-approval letter can also mean the difference in having an offer accepted over a buyer without pre-approval.

  7. Read the Fine Print
    Imagine the shock and discouragement you would feel when you learn extra payments actually cost you more due to prepayment penalties. No one enjoys wading through legal documents, but when it comes to mortgages you literally can't afford any surprises. 

When you're ready to view Augusta County homes for sale, our friendly and experienced real estate agents can help you every step of the way. Contact Old Dominion Realty and get ready to make your dream home a reality.

August
28

How to Qualify for a Home Loan

How to Qualify for Home Loan

Obtaining approval for a home loan is one of the most important things that you'll do in the process of buying a house – and for many people it's one of the most intimidating. Even if your financial picture is in great shape for obtaining a mortgage, it's not always easy to know where to start, what steps to take, and who you can turn to for advice. Here is a review of what it takes to qualify for a mortgage.

Follow These Steps to Simplify the Process of Obtaining a Home Loan

The most important thing to remember about qualifying for a mortgage is that it really pays to be prepared. Understanding the basics of how the process works ultimately saves time, makes life easier, and leads to better results.

  • Credit Score and Credit Report

    Your credit score plays a major role in your ability to qualify for a loan, as well as the terms that will be available to you. When it comes to credit score, higher is better, and the best way to build a high score is by paying back debts on time consistently. This can include credit card debt, auto loans, and most other types of loans.

    Your credit report is also a factor, and it's evaluated similar to your credit score. So if you have large, outstanding debts or judgments that have not been paid, there is a good chance you'll need to "clean up" those issues before qualifying for a mortgage.

  • Down Payment

    The down payment you're able to make is another big factor in qualifying for a loan, and the typical minimum down payment is 3.5 percent of the home's value for an FHA loan, and 5 to 10 percent of the home's value for a conventional mortgage. An FHA loan is an option for first-time home-buyers, and is also more forgiving when it comes to past credit issues. There is flexibility to make a larger down payment as well, if the finances work for you. Just remember to leave extra room in your budget for closing, moving, and other costs.

  • Debt-to-Income Ratio

    Put simply, the lender wants to know that you have a steady source of income, and that your income is enough to consistently make the necessary payments on your mortgage. This is one part of the process that often requires significant documentation, so it's a good idea to gather recent pay-stubs, your W-2 or 1099, federal tax returns, as well as comprehensive lists of your assets and debts. Combined, these documents help provide a clear, detailed picture of your finances for the lender.

  • Don't Be Afraid to Ask Questions

    Obtaining a mortgage is a complex process, especially when you're doing it for the first time. So don't be afraid to ask for help from trusted sources! Your real estate agent can tell you a ton about what it takes to qualify, and maybe even recommend lenders who could be a good fit for your needs.

    Shopping around for a loan is also encouraged, both for getting the most favorable terms and understanding exactly what your options will be. It will also help you identify the lender you'd most like to work with, which can go a long way toward simplifying the process.

Searching for the right home, and the right real estate team to help accomplish your home-ownership goals? Contact Old Dominion Realty to buy and sell homes in Virginia and West Virginia real estate markets.

Contact Old Dominion Realty

August
23

Why Real Estate Agents Ask if You're Pre-approved

Pre-approval Process
If you've been house hunting for any amount of time, there's a good chance you're all too familiar with the process. You find a few homes, meet the agents, and shake some hands. The conversation moves on to the type of homes you like, the type of neighborhood you're looking for, and maybe even making preliminary plans to visit an open house.

But before things get too far, you get the question that every experienced real estate agent asks of new clients: Are you pre-approved for a mortgage?

For some home buyers, the question comes as a shock. Aren't you supposed to be the one evaluating which real estate agent you want to work with? As it turns out, there are some very good reasons that your real estate agent asks about pre-approval.

The biggest thing to remember about mortgage pre-approval is that it has the potential to make life much easier for both you and your agent when you're buying a house. It's also good to remember that there's a big difference between assuming that you can attain a mortgage, and actually doing it – even if your credit score and finances are in great shape. With that in mind, here's why your real estate agent asks whether you're pre-approved:

  • Identifying Serious Home-Buyers
    Buying a house is a time-intensive process for you and your real estate agent. Most experienced agents ask about pre-approval because getting pre-approved shows that you are serious buyer. This is also a question your agent will ask of any buyer who wants to work with them. It's nothing personal, but agents simply want to make sure they are investing their limited time wisely.

  • Negotiate from a Position of Strength
    Obtaining pre-approval for a mortgage allows you to negotiate from a strong position. It gives you a good idea of what you will be able to spend on your home, and shows the seller that you'll be ready to hold up your end of the bargain once your offer is accepted. It's one thing to say you have the money, and another to be able to prove it.

  • Satisfying Sellers
    It's not just your real estate agent who might be interested in whether you're pre-approved. There's a pretty good chance that the seller will be, too! Pre-approval also shows the seller that you're serious about making a purchase, have done your homework, and are ready to get into the details of the negotiation.

  • A Simple Safety Step
    In some cases, showing a house alone or meeting with a new client can be a safety risk for real estate agents. Some agents have been the victims of crimes when meeting with someone who claims to be an interested customer. The agent doesn't know who you are, where you came from, or what your goals are; pre-approval shows them that you are a serious shopper. That provides peace of mind for your real estate agent, and makes it easier for both sides to take the next step.

Obtaining pre-approval is just one step on the path to buying a house. Contact Old Dominion Realty to buy and sell homes throughout the Eastern West Virginia and Central Virginia's Shenandoah Valley real estate areas.

Contact Old Dominion Realty

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