Perhaps any or all of these three mortgage-related items/risks may on your mind … We’ll try to help you answer them right now.
1) How do I feel comfortable submitting a non-contingent offer on a property when I need a mortgage, and do not have the cash to buy the property outright?
2) How do I eliminate the risk of rising mortgage rates in buying
new development that won’t be ready for a year or longer?
3) Will China and Greece impact mortgage rates at all?
How to Submit Non-Contingent Offers without Fear
In this competitive purchaser environment, I’m seeing buyers lose out on purchases because they are afraid to submit non-contingent offers to purchase.
Yes, they are taking a mortgage.
Yes, they don’t have the cash to buy the property in full, and yes- there is a small risk that a property will not appraise for the contract amount.
However, great brokers I work with like Michael Most at Citibank are telling me how his clients (and mine) can get more comfortable submitting the non-contingent offer in order to win the property:
He recommends submitting paperwork very early to get a full pre-approval from a bank, to mitigate the risk of the down payment on a non-contingent deal.
Income, assets, and credit can all be submitted for an underwriter’s approval prior to signing a contract, by having a bank run credit checks, review tax returns, and confirm all assets and income statements.
Once a buyer has a pre-approval, checking on
the building where a property is located can immediately lower the risk of a bank not issuing a loan commitment.
For a co-op or condo, most major banks have a database of approved buildings to determine if they
can lend in that specific building. Knowing this, prior to signing a contract,
Of course, the value of the property determined by the bank’s appraisal sometimes can be lower than the sales price, so be prepared to have additional assets to make up the difference if needed (as the appraisal
is completed only after contracts are signed).
With that in mind, getting together with a real estate professional to try and gauge appraisal risk is really important.
If you are pre-approved, know the building is already up-to-date with paperwork, and get enough comfort around value, then a non-contingent offer is far less scary.
New Development Mortgage Risk
New Development has been largely on my mind, given that the “new car smell” has really attracted the most buyers.
Even recently built new development doesn’t get the same pricing or cache to foreign or domestic investors/investment.
It turns out that there are some mortgage products catering the new development buyers at the moment, which are worth talking about.
The new development buyer likely knows some of the risks that come with buying in a new building or rental to condo conversion:
- Timing of the purchase – how long will it be delayed?
- Mortgage Rate Risk – what if rates go up significantly while I’m waiting to close?
- Construction Risk – obviously, the General Contractor can do a bad job
- Developer Risk – the developer can fall apart and run out of money to complete a job
In the current Real Estate cycle, seasoned developers have largely eliminated Developer Risk.
Construction Risk is something that a buyer must
study carefully – some construction will be shoddy, no question, even if nicer finishes are put into a project.
Timing of the purchase certainly can be managed, assuming most buyers will add 3-6 months or more to the dates being given to them by a sales office.
We recommend that a buyer certainly plans for delays.
Mortgage Rate Risk in this environment is definitely the most difficult to mitigate.
Assuming rates rise, and given comments by Janet Yellin, they will by year’s end – no one knows how high they’ll go and how much that will add to a buyer’s monthly cost.
Not every bank offers a way to lock a mortgage rate for a long-enough time.
Currently, Citizens Bank, a Philadelphia-based bank, is trying to break into the New York mortgage market with some specific products.
A savvy buyer of new development
would be very excited to hear about this interest-only product that helps manage this risk.
As you may know, an interest-only mortgage product allows a buyer to take on a mortgage and pay only
the interest-portion for a period of time, usually five, seven, or ten years.
Usually, the rate remains constant for one of those periods of time, after which the rate floats up (or down) to a benchmark, and can rise only a certainly amount, once a year.
After a fixed period of time, not only the interest due, but the mortgage, begins to amortize, so the mortgage effectively would become a standard mortgage, though it may have a 15- or 20-year period to pay it off.
At that time, not only would the mortgage be at the mortgage rate of the market, but it would be an accelerated payback compared to the normal 30-year mortgage.
Like I said, this product would appeal to savvy buyers who may be thinking about any or all of these things:
- They will move before the interest-period is over
- They will refinance into a different product once they close and things become clearer about interest rates
- The buyer’s income is “lumpy,” with large bonus or distribution payments at various periods of time – at which point they will pay down the mortgage
- The buyer wants to look at the overall investment marketplace and will decide whether he/she can make more than the interest rate in the market
- Prepayment on an interest-only mortgage brings the monthly payment down immediately, and may allow someone to control monthly cash-flow better
- The buyer may be financing
because interest rates are low, not because they can’t afford to pay cash
- Regardless of product, the buyer is putting 20-30% down on the purchase, and feels this gives the most flexibility to invest monies elsewhere for up to a decade
With this is mind, Citizens offers a way to lock in a mortgage rate for 12-18 months, by paying an up-front fee (up to 1% of the mortgage amount), refundable at the time of closing.
The mortgage rate is actually 3/4 of a percentage point or 1% higher than current rates, but as the closing date approaches, the bank offers the buyer a one-time opportunity to float the mortgage rate down to whatever the market rate is at the time.
What does this do?
It allows a buyer to know with more clarity what his/her monthly costs will be, while also allowing for a static or surprisingly low mortgage rate environment in 12 months to still help him/her lock in a lower rate.
The downside is then limited, with the potential for a lot of upside if rates really go up.
Thanks to Ami Rosen for telling me about this product his bank offers.
It’s very interesting to consider.
Rates Impacted by Global Issues?
Another excellent mortgage professional, Melora Love at Wells Fargo, tells me that thus far the debt or market issues within Greece and China have not drastically impacted mortgage rates downward, as anticipated.
However, when the news of a potential resolution came out, the 10 year treasury yield spiked.
In the short-term, before the Fed raises any benchmarks, it does not appear that mortgage rates are getting much, if any, help from global events.
She believes that underwriting standards may be slightly less strict over the summer, as the spring market in the suburbs subsides, and refinances start to slow down – banks such as Wells seem to have the lending capacity and want to continue to fund new loans.
That’s all for this month!