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Yeah everyone, thanks for reading!
I am looking to buy my first home with my wife, and we can not come up with the down payment for a home in Orange County.
My father has a 2nd home and willing to sell it to me to get me from renting anymore. The home is listed on zillow at like $540k, my father thinks it will appraise for closer to $580k, he is willing to sell it to me on paper for what ever it would take to close the loan. say $500k, where we are taking the appraisal amount say $560,000 and he sells to me for $500,000 leaving $60,000 to put towards the 3% down and closing costs.
the lender says I only fit into one type of FHA Jumbo Loan, a 30y fix at 7.25%. PMI, insurance, and taxes bringing a total of $12,000 at close.
He says we would have a mortgage total of like $4400 a month.
My wife and I make a combined income of $148,000. We currently have a rent of $1750 two blocks from the beach.
The home we are looking to buy has a rental home in back rented out for $1200 a month. So mortgage of $4400-$1200= $3600 is what we need to come up with every month. We pre qualified for the whole $4400 already.
I am a general contractor and can do a home improvements my self. It kills me give it to landlord, and even more to not be able to work on my own home. We don't want to live there more than 3-4 years, build equity, fix up and move back closer to the beach.
My questions to you guys are
1). Is this this really my only option, having very little $ for down?
2). Does the PMI and closing costs sound high?
3). Should we continue to rent, save the $1850 a month? Thank You
How much does your father owe on that home? $500k? And how much, if any, profit is he looking to make?
Is your father all current on his payments? I know that's an odd question but lenders don't like seeing family members "bail out" other family members from defaulting on a mortgage by buying their homes from them.
Where in OC is the home and where do you live now for $1,750 two blocks from the beach?
Is the 2nd rental unit out back a permitted 2nd unit?
Do you know if the property title is zoned R-1 or R-2?
What is your and your wife's credit like?
Would you be willing to live there longer than 3-4 years, say even 7-10 years?
Now a couple of observations.
7.25% is kind of a high rate, should be more like 6.75-7.00% range.
Since this is a 2-unit property this would be considered a non-owner occupied/investment home.
First, FHA normally requires you have a 15% down payment on whatever sales price you finally decide upon. The reason being is when you buy from your father it is called an "identity of interest transaction" and identity of interest transactions are limited to 85% LTV (15% down payment). The exception to the rule, to allow higher LTV financing, is if the home is being sold from one family member to another, which it is in your situation, so you would be OK to just put the minimum 3% down if that was the end of it... but it's not... there is another rule on top of that, and that is when it's being sold from a family member to another family member and is the seller's investment property, the maximum mortgage is the lesser of either 85 percent of the appraised value or the maximum LTV based on the sales price (which is 97.15% in CA). Then to add on top of that, if you've been a tenant in the property for 6 months that you are buying from your father than the 85% LTV limit may be waived. Complicated eh? Well to make it easy let's use an example.
Let's say you have not lived in the home for the past 6 months, also the home appraises for $560k, so 85% of that is $476,000. If he sells it to you for $560k, 97.15% of that is $544,404... $476,000 is the lessor of the two, so that is the maximum loan amount you could get and would need to be able to pay your father's mortgage off completely. It looks like maybe $500k is needed to complete that - so would your father be OK bringing in $24k at closing? Not sure if he would.
Did your loan officer bring this up?
Can't really say if the $12k in settlement costs is being overcharged or not, it's possible for that sales price, but for that interest rate those sound too high... did you get a good faith estimate (GFE)? If so, can you post all of the items?
Really appreciate your reply, the loan does not sound so cut and dry as it did before.
First off we currently live in San Clemente, and would ultimately like to purchase there. Both of our jobs are in San Clemente too.
My fathers 2nd home the one we are considering purchasing is in old town Tustin. It is a smaller 800 sq ft home in front and a larger 1100sq ft "granny unit" in back. He currently rents the front home out to a couple for $1800 a month and rents the back home to my brothers for $1200. The back "granny unit" has a non permitted kitchen. It is also R1.
Your question as to how much he owes on it. I would need to find that out. He purchased it for $422k like 5 years ago. He is not selling to get out from under it, more to help us get in our 1st home.
Our credit is good, My wife's is like 700 mine is like 675.
All it really comes down to for us getting in a home and making the payments, is the down payment.
I also will be getting a commission check of $60k probably a year from now, after building a few homes in the bay area. But even with $50k cash down does not seem to help much for a down payment these days, in the OC at least. We have been paying off credit cards from wedding, been tuff to save.
I would like to speak with who ever, if you think we should be looking to buy with our current situation.
The only real reason we are looking to possibly buy my dads tustin home is because we were told i would need really nothing down if the home appraised for more than he is willing to sell it for. I am not really wanting a condo, looking to fix up a home, preferably in south county.
Thanks again,
Ryan
Never thought of that. How do you search for a home, with the seller offering that option? or is that something a lender offers?
you can't really search for it. i thought you were purchasing from your father? has thing changed? you said he didnt have to sell. he would still be making mortgage payments, you would just be paying a bigger one to him.
fyi this is def. not something a lender offers.
its a real estate contract between the current owner and the buyer. its just a typical lease agreement contract with option to buy by a particular date. any real estate attorney can handle the contract for your state. this allows you to avoid using a bank, especially since financing is so difficult right now. there are no closing fees, just a small attorney fee to make sure your contract is legal. then sign with a notary/witness.
each payment can be considered down payment depending on how your contract is worded.
Last edited by brokerdave; 11-06-2008 at 03:10 PM..
Really appreciate your reply, the loan does not sound so cut and dry as it did before.
First off we currently live in San Clemente, and would ultimately like to purchase there. Both of our jobs are in San Clemente too.
My fathers 2nd home the one we are considering purchasing is in old town Tustin. It is a smaller 800 sq ft home in front and a larger 1100sq ft "granny unit" in back. He currently rents the front home out to a couple for $1800 a month and rents the back home to my brothers for $1200. The back "granny unit" has a non permitted kitchen. It is also R1.
Your question as to how much he owes on it. I would need to find that out. He purchased it for $422k like 5 years ago. He is not selling to get out from under it, more to help us get in our 1st home.
Hi Ryan,
It's not too complicated, one just needs to know if there are any special circumstances which would apply.
At least if you were to live in Tustin you'd be going the opposite of traffic to/from work, but if gas gets up there again that commute would start to cost a lot more. The good with the bad.
This home keeps on getting more and more interesting. So is the 2nd unit out back permitted, just the kitchen isn't permitted?
Would your dad be kicking out the couple who are living in the front unit, or is their lease ending anyways?
If your dad didn't refinance, and didn't get an Option ARM mortgage, then he probably doesn't owe any more than $422k on the home. Seller closing costs will probably be in the $5k range, or $427k, and let's say your closing costs are $12k, which he could pay for by giving you a closing cost credit (different from what I'm about to go over). All of that totals $444k or let's just round up to $445k. $445k is 85% of $523,529 or let's use $524,000 to keep it easy. $524k would be the sales price. Since the home will appraise (or assuming it will appraise) at $560k then that shouldn't be a problem to sell it for that much (only a problem to sell it for higher than the appraised value). The down payment listed on the purchase contract would be 15% ($78,600), there would be no earnest money deposit given (since you and your dad trust each other I imagine), and your father would also agree to pay $12k towards your closing costs.
The $78,600 down payment wouldn't be coming from your own funds, instead it'd be coming to you as a gift, a "gift of equity", from your father. So he would need to write a gift letter stating he is giving you $78,600 in the form of equity, it would also show up on the Final HUD-1 settlement statement, and I could be wrong but I also think it needs to be reported to the IRS on his or your taxes (consult a CPA on that part) because one can only "gift" up to a certain amount before the IRS wants to tax it I believe.
Quote:
Originally Posted by Tru2775
Our credit is good, My wife's is like 700 mine is like 675.
All it really comes down to for us getting in a home and making the payments, is the down payment.
I also will be getting a commission check of $60k probably a year from now, after building a few homes in the bay area. But even with $50k cash down does not seem to help much for a down payment these days, in the OC at least. We have been paying off credit cards from wedding, been tuff to save.
I would like to speak with who ever, if you think we should be looking to buy with our current situation.
The only real reason we are looking to possibly buy my dads tustin home is because we were told i would need really nothing down if the home appraised for more than he is willing to sell it for. I am not really wanting a condo, looking to fix up a home, preferably in south county.
Thanks again,
Ryan
Your guys credit is good but your score would need to increase 5 points for this other option I was thinking, which is this program that is being eliminated by lenders as I type - called the Conforming Jumbo. You can get a gift of equity on that program too, but if the total down payment is less than 20% and you get a gift, then you yourself need to put 5% down from your own funds which it sounds like you might not want to part with (I don't blame you). But if your father only needs $445k (staying with the above example), then $445k is 80% of $556,250 which is within the estimate of $560k appraised value we've been using. In that situation you get to avoid mortgage insurance all together. I say it's being eliminated as I type because the program needs to have the loan fund by the end of the year, so lenders aren't wanting to cut it close and 1 by 1, have started to eliminate that program from their lineup. A new program, called Super Conforming, is replacing it, and currently the guidelines for that program have not been released... although it's rumored to be pretty similar to the current Conforming Jumbo. Expect there to be a period of a month or two (thinking from early December to mid/late January) when no conforming program over $417k is available on 1-unit properties.
Now the reality of it is, is that you might not see an increase in value on this home in Tustin during the next 3-4 years, it might take 7-10 years before we fully recover in values here. Might even decline from here to 3 or 4 years from now. Some people might say I'm crazy but it's definitely possible. Took a long time for prices to rebound back from the real estate crash of the 80's, not surprising if it took that long again. So if you buy the home you'd need to be prepared for that situation. But being a 2-unit property in old town Tustin, after you are through living in it I would hold onto that property for life, use the income from the two units to offset the mortgage payment, and pass it onto your grandchildren so they can get some passive retirement income.
If you are going to look into lease to owns, which I don't really recommend (and I'll go into detail in a second why), then you will want to get in touch with a real estate agent so they can comb through the MLS (multiple listing servie) where all of the homes for sale are listed (except for sale by owners). They can set you up to get emailed listings that match your criteria (bed/bath count, sq footage, if they will do a lease to own, etc.). I have a real good friend of mine, Ola, who is a real estate agent for REMax and lives in Mission Viejo if you want to be introduced.
For a quick primer on lease options, they have good & bad points. They benefit the seller in a falling market, the buyer in a rising market. You pay your option money upfront; amount is negotiable. Understand you will not get that money back if you decide not to purchase. It is not a deposit. You are purchasing literally the option to buy at a future date. You can generally negotiate the period of time you have to exercise the option. You will have to pay fair market rent and money on top of that if you are trying to accumulate a down payment for permanent financing later.
There are some serious hazards right now most important of which is that many sellers trying to do lease options are in trouble with their mortgages & you run the risk of the property going into foreclosure & losing your money. Having a recorded lease will not protect you. If the bank takes the house back, you are out. But do talk to a RE attorney if that happens.
If you think prices will fall during your option period, you could end up with a price that is no longer realistic & if the house won't appraise for that amt, you will be out of luck. You could agree to set the purchase price later based on an independent appraisal, but that could be leaving the door open to some disagreement down the road.
My advice would be to talk to a RE attorney before handing over any money and talk to a mortgage broker about how to set up a lease option in such a way that it will be possible for you to get permanent financing when you decide to go forward & purchase.
The big benefit to the seller/landlord is having tenants who have a stake in maintaining the property & a purchase price potentially locked in.
the gift that he mentions has a limit of $12,000 to stay tax free. a lot of people will do 2 gifts on December 31 and Jan 1st to give double tax free. Also, keep in mind that a person is limited to $100,000 total during their lifetime if he has ever given you gifts prior to this.
just go to a real estate attorney if you decide to go with the lease option. this is a pretty common thing, all attorneys know how to do this. i would recommend an appraisal, just so you know where you are at.
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Thanks Shane
