Our industry received some good news yesterday when the Federal Reserve’s policy making arm said that they have decided to keep short-term interest rates near zero for an “extended period”.  This should help stabilize 30 year fixed rates and keep them at reasonably low levels.    This is great news for all of us because low interest rates will bring new buyers into the market.  It is always nice to hear good news! 

Community Banking Specials (First Place Bank):

- 80/10/10’s available with fixed rate seconds

- Best in the industry group of local appraisers (No 3^rd Party system like the “big banks”)

- In-office underwriting, processing, and closing (The file never leaves Rockville….. closing papers to the settlement table a few days before closing)

- Discounted 30 year fixed rates (upper 4’s / up to $729,750)

***About First Place Bank

First Place Bank is an established community bank new to the MD/ DC/ VA market.  With all the struggles of the “large banks” the community banking model has proven to be much more efficient.  We still offer 80/10/10’s, in-house operations, and have a group of local approved appraisers (no 3^rd party appraisal system).  My entire group made the move to First Place Bank after thirteen years at a large bank mainly because we believe in a higher level of service.  We work with some of the best Realtors in the area and our goal is to create a new, higher standard in the mortgage business.  We think all top Realtors should have a community bank option to rely on.  We are changing the way people think about the mortgage business.  

Call us for the best Bethesda home mortgage rates!

Chad Loube

First Place Bank
Sr. Vice President / Regional Manager
15400 Calhoun Drive Suite 170
Rockville, MD 20855
Phone: (301) 279-5125  Efax: 301-560-6571
Mobile: (301) 452-7399
Email:  CLoube@fpfc.net
Web:    www.FirstPlaceBank.com/ChadLoube

Enter havoc. About 10 days before settlement the lender, a Credit Union, sent a note that sent chills down my spine. Unwarrantable condo. Investor ratios are off, self managed and not enough in reserves. We had already asked these questions to ensure that the investor ratios would work for the lender! The buyer's first choice of lender would only go to a 30% investor ratio and I already knew they were under 50%, but just… So before even going down that route, I had asked the condo association if they had any unpaid condo fees, if their reserves were in line and their exact investor ratio.

But now I realize it's not enough. Now we have to know how many second home owners there are and more importantly, how any particular lender is going to interpret that info. Because our problem stemmed from 8 second home owners who were counted as investors by that lender. Yikes. There went our 50% investor ratios. 

The credit unions do vanilla. They do vanilla fine but if there are any issues beyond that they simply cannot adjust since it's not what they are set up for.

Hence, we quickly had to go to the third lender to see if they had an exception process we could use. Between BB&T and Prosperity they both felt they could get the loan through but since the rate was great and Prosperity could close on the day we originally scheduled (only 10 days in the future) we were dancing! And we danced up until 5:00 pm on the night before settlement, scheduled for 8 am the next morning, when the condo exception dude in CA said, "nope." He didn't like the reserves which were not as much as he wanted to see for a building of this age. The underwriter had been fine with the reserves since I'd been insistent on asking before we progressed to spinning money. OMG.

The sellers had bought another house with a coinciding settlements contingency, which was very smart. The seller of the house they bought didn't seem to understand that risk and had already moved out to their new house!  Imagine their utter shock when they were told their home wasn't going to settle.  So we had lots at stake with this first leg in the chain. And our buyers and sellers were all calling us to figure out what to do. At that point we were ready to admit defeat and had my buyers sign a release since it just wasn't going to go through. Sellers were out of town and didn't sign right away. And then yet another miracle…. the lender here went back to the condo association and got more data on their budget which allowed her to put it back through the exception process and it got approved!

The condo in Bethesda at the Crescent Plaza is in fabulous shape and the building is one of the best managed I've seen. Their reserve drama stemmed from how they had spent some money on upgrades that saved energy and were wise choices but didn't put the right numbers on the books. Had it been they were not so well managed, my buyers rightly should have taken this as a sign to bail, but there were not any other condos they liked so well as this one. Condo fees are low, location is to die for, condition is superb and renters just love the Metro access. And who wouldn't love walking out to shops and restaurants any night of the week!

So lesson learned: even more questions up front!

1) How many investors exactly are in the building?

2) Does any one person own multiple units?

3) How many second home owners are there?

4) Anyone not up to date on their condo fees?

5) What is the % amount of reserves?

6) What is the $$ of reserves?

7) How much distress in the building?

 - FHA approved building?

The problem with getting the answers to these questions is it's very difficult. They condos don't want to answer questionnaires until they are sent from a bank with a fee. At this point, I think it's a wise investment to pay the money they want, get the answers and then make sure the lender can lend based on the answers BEFORE starting the process. Whether listing or helping buyers we need to know the info before hand to avoid the disastrous unraveling of real estate that could have happened but for the tenacity of two agents and Karen Van Zandt from Prosperity in Bethesda!

So when you happen upon my newest listing that will be coming up at The Iowa in DC or perhaps another condo in Bethesda, don't be surprised if before we take your contract we want to know if your buyer's lender will have any heartburn over any of the provided answers!  And if you are thinking about buying a condo in Bethesda, I'm happy to help…

Here is the language:

C. FINANCING (Must Select Option 1 or 2) Not to be used with Seller Financing

Option (1) This Contract is contingent on Purchaser obtaining approval for loan(s) to purchase the Property .  This Contract is contingent until 9 p.m. ____ Days after Date of Ratification (“Financing Deadline”) upon Purchaser Delivering Notice to Seller on the Regional Form #100 removing this Financing Contingency. Such shall or shall not be accompanied by a letter from the lender (“Lender’s Letter). Such Lender’s Letter shall include the following statements or statements substantially similar thereto:

1) Purchaser is approved for the Specified Financing,
2) a ratified Contract has been received,
3) a written application for the financing has been made,
4) income, asset, and liability documentation on Purchaser have been received,
5) Purchaser’s credit has been reviewed, and
6) the application has been reviewed and meets underwriter and investor guidelines.

If Purchaser fails to Deliver Regional Form #100 and Lender’s Letter (if required) by the Financing Deadline, this contingency will continue, unless Seller at Seller’s option gives Notice to Purchaser that this Contract will become void. If Seller Delivers such Notice this Contract will become void at 9 p.m. on the third day following Delivery of Seller’s Notice unless prior to that date and time:

a) Purchaser Delivers to Seller Regional Form #100 and Lender’s Letter (if required); or
b) Purchaser Delivers to Seller Regional Form #100 and provides Seller with evidence of sufficient funds available to complete Settlement without obtaining financing. Upon Delivery to Seller of either (a) or (b) above, this Contract will no longer be contingent on Purchaser being approved for the Specified Financing and this Contract will remain in full force and effect. Prior to satisfaction or removal of the Financing Contingency, if Purchaser receives a written rejection for the Specified Financing and Delivers a copy of the written rejection to Seller, this Contract will become void.

Most folks are going to finance the purchase of homes for sale in Bethesda.  Few of us have a million bucks laying around so we depend upon the bank!  As such we are likely to have a financing contingency in place in our offers to purchase. The standard financing contingency allows for a certain number of days for the buyer to get financing firmed up and deliver a letter from the bank that says they are good to go.

But let's look at this in terms of who we represent:

Buyer's Agent

My attorneys have advised me never to clear this contingency and to simply let it run until settlement.  As a buyer's agent it is my responsibility to protect them to the best of my ability.  Stuff happens on the way to settlement and a buyer needs the protection a contingency affords them.  If there were some last minute hitch and financing was denied then the buyer could get his/her deposit back and be free and clear.  With a cleared contingency the buyer is in default and is at risk to lose his/her deposit money.

There is no legitimate reason to clear the financing contingency unless forced to by the seller to stay in the deal.  It is in the buyer's best interest to maintain the protection afforded by the contract language.

In general the legal advice I've followed is to let this contingency run until settlement.  Never voluntarily clear it because we don't know what might happen.

Seller's Agent

There is a provision for the seller to deliver a Form 100 letter that essentially demands that the buyer clear the contingency or else they'll void the contract.  Powerful for a seller who is unsure of the buyer's ability to follow through on a purchase and also a way to force a buyer out of a contract if they are unable to clear that contingency in the 3 day time frame they are given to do so.  But a seller who wants to keep a buyer in the contract should be very wary of delivering this notice in case the buyer is getting cold feet and simply uses this as an additional out.

In protecting the interests of the seller it would seem to be the right decision to get the contingency cleared.  But doing so by delivering a notice that allows the buyer to fail to respond thereby voiding the contract would be contrary to the seller's goal of selling his home.   In the case of a shaky buyer who is not responding to requests from his lender, who has not displayed the good faith that he can get to the settlement table, it may be best to force him to put up or shut up sooner rather than later so you can get the house back on the market quickly.  

Or let's say you get a better offer and want to be able to take it.  You could try to force out the first offer with the financing contingency.  And if they can't or are not willing to clear it, you'd have a route to take the new offer.  Assessing the situation and making recommendations that are pertinent to only that situation requires enough knowledge about the regional contract and its implications to give good advice.

I had to deal with a FSBO recently who knew enough to be dangerous but not enough to get out of his own way and he wanted to make sure he could deliver this form 100.  Day 30 was going to be right at the end of underwriting, days before settlement.  Geez.  Do you or do you not want to sell your house?  With exceptionally well qualified buyers who have jumped through all the hoops just check in with the lender and make sure they are progressing before you simply take your "right" to clear a contingency.  Sure it's nice to take away the doubt but each transaction has a certain amount of risk you simply can't cure.

When buying or selling a home in Bethesda there is more to the transaction than the "deal".  Understanding the implications of each decision is an important part of the buyer or seller's overall education.  I don't expect you to learn it to the degree I understand the contract but we should have the discussion so you understand what could happen.

I use a spreadsheet to help understand an estimate of what those costs will be.  Your lender will do a Good Faith Estimate when you’ve found an actual home to buy and that will look different from this initial estimate.  But my goal is to get you to understand how much it will cost you to buy a home so when we are looking, you are completely informed and have the financial ability to back up your purchase. 

So let’s get to it! 

Section 1

The purchase price is entered into this cell.  It will set many of the other values of the spreadsheet so you can play with different scenarios.   The down payment can be changed to the amount you will be putting down.  Generally for an FHA loan you’ll need 3.5% down and for conventional loans likely 10% or more.  Your loan amount will change based on the down payment amount.

Section 2

In this section you’ll set the values for the taxes, HOA/condo fees and property insurance amount.  Each property you look at will have a different estimated tax on the property, which is different from the amount the current owner pays.  I’ll pull those tax records for you so you can enter the amount in this cell.

Call your insurance company to check the CLUE report for the property you are considering.  You are looking for insurability on the property and to verify that there were not excessive claims due to damages.  If there have been many reports, the insurance amount could be so high as to substantially change your monthly payment, to the point of not being able to afford the home.

Section 3

The interest rate you will be paying.  Play with this a bit.  See how much that monthly payment changes when you change that rate from 5% to 6%.  This is what will drive so much of your home’s overall affordability so it’s important to understand its weight.  The overall loan to value ratio will change based on how much you are putting down.  The more you put down the less risk the lender feels they are taking.

Section 4

This section is what your loan will cost you.  As you get the official GFE you’ll be able to compare costs from one lender to the next.  But one of the most important areas of this section is the points or where you could buy down your rate.  Since you’ll have this home for a while and since rate affects your overall affordability of the home, there are times when you’ll want to consider paying a percentage up front to get a better rate for the long term. 

The loan origination fee is what it costs to get the loan.  These fees vary tremendously so you’ll want to discuss with your lender

Important to consider is that this will consume some of your ready cash right now. As you work with your lender you’ll play with the numbers to see how the rate and buy downs affect your total payment and cash to close.

Section 5

These fees are fairly similar among the settlement companies.  I am happy to recommend some of those I trust.  They will be the folks who handle the transaction at the end.  A couple weeks before closing they’ll be doing a title search and abstract to ensure there are no issues with the title, have a property survey done,  ensure the parties get paid, the contract is fully executed, the lender’s instructions are followed and all the paperwork that needs to be signed and filed is done in a timely and professional manner. All the parties to the transaction will meet at the attorney’s office the day of settlement

The role the settlement attorney plays is very important and you want to be sure they will follow through on all filings that are required.  Well respected firms are a much better option.

Your lender will require lender’s title insurance and you can optionally buy an owner’s policy.  Since legal work can be so costly and since you cannot sell your property with a cloud on the title, it is generally strongly recommended you purchase both.  Cost is $4.5 per $1000

Section 6

Can’t get away from death and taxes.  These are set by law so you’ll know exactly how much they are depending upon the purchase price.  The custom is for the parties to split the transfer and recordation taxes equally so the amount you see on this spreadsheet is the buyer’s half.  For Montgomery County:

• The County Transfer tax is 1% of the purchase price. 
• The State Recordation tax is $6.90 per $100 for any amount under $500K and $10 per $1000 over that amount
• The State Transfer tax is 1/2% and is waived for first time home buyers. 

Section 7

Depending upon the timing of settlement you will owe interest for some days.  Mortgages are paid in arrears so you are always paying last month’s mortgage.  When you are settling you are paying the interest only for those days which you will actually occupy the home of the current month.   This is one of the reasons why most buyers will settle at the end of any given month, since they might only accrue a day or two of interest. 

You can pay your hazard insurance premium either at settlement or pay it directly to the insurance company beforehand.   They will provide a binder to the settlement office as proof of insurance for the lender.

If you had a second loan, the interest rate for that is set in this section.

Section 8

Most of these charges are paid outside of closing (POC).   You will pay your home inspector at the time of inspection, and you’ll likely pay the pest company at the time of inspection.  The survey will be paid at closing and you’ll see it on the HUD1.

Surveys are either line drawings or boundary surveys.  If you plan to do construction, put up a fence, or are uncertain where the property line is exactly it is better to spend the extra money on the boundary survey.  The difference is ~$200 to ~$1200.

Section 9

The lender will open an escrow account for you to pay your taxes and your insurance.  Since taxes can take a priority position if unpaid, the lender will protect its investment by ensuring the taxes are paid.  And the same for insurance – the lender will make sure you don’t let that coverage lapse and pays the premiums for you.

They’ll collect 2 months of hazard insurance and depending upon the month of settlement will collect a number of months taxes to ensure they can pay the next installment.

If there is mortgage insurance or condo fees they will collect those in advance as necessary as well.

Section 10

If the seller has paid taxes through June 30 and you settle on May 31, then you will owe back to him/her the taxes for June since you’ll be occupying in that month.  Because our payment schedule in Montgomery County is wacky, we always have to figure this out carefully.

Section 11

This is the total cash to close section that will add up all the other areas and give you a number to bring to closing.  it’s an estimate but it should be pretty close to what will be the final unless you start to make a lot of changes with your lender on points or origination fees.  I’ve seen folks get bitten by not remembering how much that is going to add and it’s a surprise to come up with the extra money.

Your downpayment, the totals of the lender fees, taxes, attorney fees, prepaids and anything you owe back to the seller are all totaled.  If you have an earnest money deposit or a seller credit that will be deducted from the amount you need to bring to the table.  These funds must be in a certified check.

When you hear someone say a "seller credit" this is where it’s applied.  A seller could give you back, say,  $10K to pay any of the fees we’ve outlined above, including points, condo fees, taxes, etc.  For many buyers who are cash poor this is the way they can get into a home.  The lenders have strict guidelines about how much seller help they’ll allow in the transaction so we need to be careful if there are seller credits and we are negotiating a credit for home inspection repairs that we don’t go above the amount the lender will allow.  FHA has reduced this from the higher level.  Seller credits are part of the negotiation you might have in the transaction.

Section 12

This section nets out your monthly payment.  While not exact it’s usually pretty close.  Your PITI is the principal, interest, tax and insurance you’ll pay each month.  If there is a condo fee or MIP it will also need to be calculated into this payment.  This is based upon the purchase price of the home.  It’s interesting to see how little a $10K change in your downpayment affects the monthly payment.  There is a much greater difference if you can affect the interest rate so I encourage you to run the numbers and talk with your lender to see what is the most cost beneficial.

Section 13

We pay taxes twice per year as principal home owners:  September 30 and December 31.  Because this schedule is so close together we have to figure out how many months will be needed for escrow based upon the month of settlement.  Because it’s confusing it’s easier to just estimate 11 months and then get more specific as a property is chosen and a date specified.  There will be some amount you pay as the buyer and likely some amount due back to the seller.

So there you have it.  Closing costs in a nutshell.  Well, more than a nutshell and I know they are confusing!  But armed with knowledge, you’ll make a much better decision about that house you want to buy if you know exactly what it’s going to cost you and how that fits into your financial plans.  I’m always here to help you understand it all!

If you search for "bi-weekly mortgage" with an Internet search engine, you will be overwhelmed by the number of companies offering "Bi-weekly Mortgage Reduction Services" or "Bi-weekly Savings Programs." Beware, you are entering dangerous waters.

Your actions after receiving lender approval for a mortgage loan can disqualify you for the loan. A mortgage loan is conditionally approved, with the lender reserving the right to re-verify credit, income, assets and employment at anytime. The lender may cancel the loan if there are any adverse changes to your qualification status.

• Appraisal - A carefully documented opinion of value by a licensed, professional appraiser.
• Credit Report – A detailed report of your credit, employment and residence history prepared by a credit bureau.
• Principal – The amount owed on a mortgage which does not include interest or other fees.
• Document Fees, Loan Fees and Processing Fees – Miscellaneous fees charged by the lender.
• Discount Points – Points paid in addition to the loan origination fee to get a lower interest rate. (1 point = 1 percent of loan amount)
• Origination Points – the total number of points paid by the borrower at closing. (1 point = 1 percent of loan amount)
• Interest Rate – A percentage of a loan or mortgage value that is paid to the lender as compensation for loaning funds.

• Offers predictable monthly payments for the duration of the loan
• Provides protection from rising interest rates. No matter how much market rates increase, your interest rate remains fixed.

• It may be more difficult to qualify for a given loan amount, since the interest rate is higher.
• If interest rates drop significantly, you will need to refinance to take advantage of the new, lower rates.
• Fixed-rate loans are generally a good choice for borrowers who plan to stay in their homes for a long period of time or have a lower tolerance for financial risk.

• The initial, or introductory, rates for adjustable-rate mortgages are generally lower than those for fixed-rate mortgages.
• Some ARM’s offer one of the major advantages of a fixed-rate mortgage, by allowing you to lock in the low, introductory rate for several years before any adjustment takes place. For example, some lenders offer 10-year ARM’s, which have a lower start rate than a 30-year fixed-rate mortgage, but which do not adjust until the 11th year.
• Because of the lower start rate, borrowers may qualify for a larger loan amount, and therefore, a more expensive home, than with a fixed-rate mortgage.

• Although most ARM’s have interest rate caps that will protect you from sudden increases in your interest rate, if market rates go up, your payment will likely go up also.
• If your interest rate – and payment – increase enough, your home could be unaffordable.
• Adjustable-rate mortgages are often a good choice for borrowers who think they may want to sell or refinance early, expect their earnings to increase in the future, or are looking to purchase a home when interest rates are relatively high.

To stay competitive in a tight market, some buyers make the choice of securing a bridge loan (also known as a swing loan or bridge financing).  A bridge loan covers the gap between the time a buyer closes on their new home and the time in which their old house sells.

Typically a bridge loan is structured as a one year loan.  The bridge loan pays off the buyer’s first house with the remaining funds, minus closing costs and six month’s of interest, going toward the down payment for the new house.   

If after six months the first house has not sold, the buyer will begin making interest-only payments on the bridge loan.  When the first house sells, the bridge loan is paid-off.  If the old house sells within the first six months, any unearned interest payments will be credited to the buyer.

This is the typical bridge loan scenario for most buyers.  In some cases a buyer may qualify for a bridge loan that simply adds the cost of their new house to their current debt. 

The advantage of a bridge loan is that it allows you to make a competitive offer on a house without a contingency clause.  The disadvantage of a bridge loan is that it is usually a short-term loan (1 year or less) with high interest rates.

With my knowledge of local market conditions, I can help you determine whether a bridge loan is your best option for making a competitive offer.  Let’s get together to talk about your options.

Obtain a Written Agreement

Lock-in Options

•  Lock-in interest rates and points.  This will give you a clear understanding of how much your mortgage will cost. Neither your interest rate nor points increase during the lock-in period. This protects you against rising market conditions.
• Lock-in interest rates and floating points.  Your interest rate is locked-in and will not change for the lock-in period, while your points may rise and fall with market conditions. With this option, your lender may allow you to lock-in the points at the current market condition some time between submitting the loan application and closing.
• Floating interest rates and floating points.  This gives you the option to lock-in the interest rate at some time between submitting the loan application and closing. This puts you at risk if interest rates and points rise and may not be best for a homebuyer with a tight budget.

The Cost of Locking-in the Rate

The Lock-in Period

The Lock-in Expiration Date