Educate yourself today with Taylor Reaume’s Mortgage Library

Q: Hi Taylor, I am self employed and I am looking for a cash out refinance on my primary residence. Can you tell me what factors the bank is going to be looking at in the qualification process. I am wondering how I am going to qualify, I remember doing the refinance last year vaguely, but I cannot remember how they qualified me. I know it was kind of difficult to qualify me. Donna, Whittier , ca

A: Donna, if you are self employed you will most likely want to try and qualify based off your last 12 months bank statements. Most of my self employed clients have unsteady income, and hence it is difficult to show regularity in the month income. Banks understand this, and they will allow a special qualification method called 12 months bank statements. They add up all of your deposits found on your last 12 months Bank Statements(less transfers), and divide by 12 to arrive at your monthly income. The other side of the coin is to show your last years tax returns (1040's), as long your AGI (adjusted gross income) is high enough. The AGI is the amount you made last year after all of your write-offs. Typically most self employed business people write off lots of stuff, and this method is rarely used. If you cannot show enough monthly income on your bank statements, or your 1040's then of course you can always go stated and take the slightly higher rate.

Q: Taylor what is the deal with this Capital Gains stuff? Can you help me to understand what happens if I sell my home and what taxes I will have to pay? Theresa, Seal Beach, CA

A: Teresa, Back in 1997, the tax code was changed to exempt the first $250,000 in profit ($500,000 for couples) as long as sellers live in the house for two out of the past five years. That means a couple who bought their house in 1999 for $200,000, for example, won't owe capital-gains taxes unless they sell it for more than $700,000.

Even if your home sale gains exceed the exemption amount, there are still some ways to lower your taxes. You can use any money you spent on closing costs when you bought the house (not counting points you may have already deducted) or home improvements to increase your cost basis, which in turn lowers your taxable gain. To qualify, the home improvements must add value to your home -- such as building a new room, a swimming pool or adding central air conditioning. Basic repairs don't count.

For example, if a couple bought the house for $200,000, paid $3,000 in closing costs when they bought the home and spent $50,000 building a new room, their basis increases to $253,000. If they sell for less than $753,000, they won't owe a dime in taxes.

You could get stuck with a capital-gains tax bill, however, if you live in the house for less than two years. In that case, you would owe capital-gains taxes on a prorated portion of your profits (if you lived there for one year, for example, you're eligible for half of the exclusion). There are a few exceptions to this rule, however. You can still get the full exclusion if:

You move because of a new job that is at least 50 miles farther away from your old home than your old job was. You must move for your health or the health of relatives in your care.

You are affected by other unforeseen circumstances approved by the IRS, such as death, divorce, becoming eligible for unemployment compensation, multiple births from the same pregnancy, damage to the home from a natural or man-made disaster or an act of war or terrorism, and a few other reasons. For details, see IRS Publication 523, Selling Your Home.

Q: Taylor , I am self employed and looking to take some cash out of my home for a new pool. Last time I refinanced I they wanted to see my business license, and a CPA letter. Will you be needing that too ? John, Huntington Beach , CA

A: John, Yes you are correct. Lenders will require self employed borrowers to provide a copy of the business license, and/or a letter from a CPA affirming that he/she has been preparing the tax returns for you as a self employed borrower for the past 2 years. Business cards, a website, an 800 number, and a letter of explanation regarding what the business is about is very helpful in qualifying.

Q: Hi Taylor, Can you just explain for me the difference between FULL DOC vs. STATED for me once again? Ann, Bend , OR

A: Ann, Absolutely. Going "full doc" means that the Lender is going to give you a better interest rate for proving your income to them. When going full doc the Lender will request to see your income documentation, such as your last two paystubs, and your last two years of W2's. Self employed borrowers often have difficulty going Full Doc because of all of the write-offs they claim, and cannot prove enough monthly income from their tax returns. There is an alternative solution for these borrowers. It’s called going ALT DOC. Alt Doc is a method of qualifying for Full Doc rates by showing last 12 months Bank Statements. Lenders realize that many self employed people have unsteady income, and for this reason they will accept your last 12 months bank statements as proof of income, WITHOUT needing to see your tax returns. They will simply add up all of your deposits from your bank statements (less transfers) and divide that number by 12 months to arrive at your qualifying monthly income figure. Going Stated means that the lender is going to take your word for it, and accept whatever you state on the 1003 application as your monthly income figure. Going STATED is the most common way of qualifying for a mortgage - the least headache.

Q: Hi Taylor! I was just wondering why the lender waited until the very end of the loan process to call my employer and verify that I worked there? Why didn’t they do this in advance? Peter, Seal Beach , CA

A: Peter, the reason why lenders wait to call your employer until the very end of the loan process is because they want to be sure that you still have a job! They do that intentionally…it is not them being lazy, they want to make sure you still have the job when you sign for the loan. Wage earners always need to provide the number to their manager or boss, because the lender will do a 30 second phone call to verify that you do in fact work there. They typically do not verify income, they just verify that you are still working there is all.

Q: Taylor, I have had 3 jobs in the last 2 years…is this a problem? Sarah, Culver City , CA

A: Sarah, Lenders typically want to verify 2 years of employment history (company names, addresses, telephone numbers, dates). They do not like to see GAPS in employment history, and will require an explanation from you. If you have had your current job for less than 1 year, the lender will require your previous employment information (company name, address, telephone number, dates you worked there over last 2 years), same with your rental or address history. A letter of explanation helps to facilitate this matter.

Q: Taylor, my husband and I are really under pressure to get this loan done quickly. We need the money to complete the construction of our home. Is there anything that I can be doing to help you speed up the loan process!? Bob, Pasadena , CA .

A: Hi Bob, our average loan transaction takes about 2-3 weeks. However this can be sped up or slowed down depending upon your level of involvement and attention to what we are needing from you. It largely depends on how soon the appraiser completes the appraisal and how fast you can get us the documents that we need to submit to the Lender. The faster you can get us the documents we need, the faster your loan will get processed. However, please keep in mind that we, like you, are also at the Lenders mercy. By responding promptly to all of our requests for documentation, your loan will be processed faster.

Most Lenders have what is called an Appraisal Review process. This means that they will place your appraisal into a review department to verify that the value checks out. This is important to them since they are loaning such a large amount of money on the home. After the appraisal review process is completed, your loan documents should be ready within a week or so.

Please be aware that the lender may send you out a unofficial or "boiler plate" loan package. This is simply an industry requirement, they are notifying you that they are working on your loan documents. You do not have to do anything with those papers except file them away. Do not get scared if what you notice some items are inaccurate in the Lenders Loan Package, this is most likely because we are getting your "Off Sheet Pricing". The official loan documents that we have you sign with the notary will be correct based upon what we spoke about.

One thing that you can do to speed up the process is to sit down and write a LETTER OF EXPLANATION to the lender, thanking them for consideration. This always gets your file to the top of the stack, because underwriters appreciate it when you explain all of the possible complications with your file.

Q: Taylor, I got some papers from escrow, what should I do with these? Can you explain the escrow process for me? Robert Arcadia, CA

A: Robert, the escrow company is an essential component of the loan process. Please remember to sign any Escrow Papers that are sent to you. Escrow will be handling the payoffs off your debts and they will also be dispursing your cash out proceeds to you. You have the option of receiving your cash out proceeds via wire transfer or check, please remember to tell the escrow agent at the signing which method you would prefer. Whether you are the buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with. The principals to the escrow – buyer, seller, lender, borrower – cause escrow instructions, most usually in writing, to be created, signed and delivered to the escrow officer. The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required in the escrow can be met or achieved, the escrow will be "closed." Each escrow, although following a similar pattern, will be different in some respects, as it deals with your property and the transaction at hand. The duties of an escrow holder include; following the instructions given by the principals and parties to the transaction in a timely manner; handling the funds and/or documents in accordance with the instruction; paying all bills as authorized; responding to authorized requests from the principals; closing the escrow only when all terms funds in accordance with instructions and provide an accounting for same – the Closing or Settlement Statement.

Q: Taylor, I am worried about my scores being too low to qualify. What is a FICO score anyway? How can I increase it? Charles Newport Beach , CA

A: Charles, a FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit bureau reports.

Credit scores analyze a borrower's credit history considering numerous factors such as:

Late payments
The amount of time credit has been established
The amount of credit used versus the amount of credit available
Length of time at present residence
Employment history
Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are really three credit scores computed by data provided by each of the three bureaus--Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.

How can I increase my score? While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.

Pay your bills on time. Late payments and collections can have a serious impact on your score.
Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.
Remember to keep at least 2 credit cards with over 2 years of credit history OPEN, as they will help your scores.

What if there is an error on my credit report? If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S. , Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your mortgage company may help you correct this problem as well.

Q: Hi Taylor, when I purchase my home a couple years ago, we got a loan through Homecomings Financial. They sold our loan to servicing company a few months later…and I was just wondering if that is going to happen again?

A: Your loan can be sold at any time - It is very common for mortgage banks to sell off loans. There is a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. This secondary mortgage market results in lower rates for consumers. A lender buying your loan assumes all terms and conditions of the original loan. As a result, the only thing that changes when a loan is sold is to whom you mail your payment. In the event your loan is sold you will be notified. You'll be informed about your new lender, and where you should send your payments.

If your lender goes out of business, you are still obligated to make payments! Typically, loans owned by a lender going out of business are sold to another lender. The lender purchasing your loan is obligated to honor the terms and conditions of the original loan. Therefore, if your lender goes out of business, it makes little difference with regards to your loan payments. In some cases, there may be a gap between the date of your lender's going out of business and the date that a new lender purchases your loan. In such a situation, continue making payments to your old lender until you are asked to make payments to your new lender.

Q: Hi taylor, what is private mortgage insurance? I was talking to a friend today about that…he said he has to pay it because he is over 80% LTV on his home. Will I have to pay that to? Cheryl, Honolulu , HI

A: PMI is normally required when you buy a home with less than 20 percent down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage insurance companies to protect the lender. It enables lenders to offer loans with lower down payments. In effect, mortgage insurance pays the lender a certain percentage of your original purchase price to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you would need to make a 20 percent down payment in order to buy a home. The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10 percent down payment is less than the cost of PMI on a 5 percent down payment. Your PMI premium is normally added to your monthly mortgage payment. Federal law requires PMI to be cancelled under certain circumstances, and Fannie Mae guidelines provide for cancellation of PMI in additional situations if the loan is owned by Fannie Mae. In general, PMI for a loan originated on or after July 29, 1999, which is secured by the borrower's one-family principal residence or second home will be cancelled at the borrower's request when the loan-to-value ratio (LTV) reaches 80 percent based on the value of the home at loan origination. In order to cancel PMI under the rules of July 29, 1999, the borrower must have a good payment history and the property value must not have declined. PMI on mortgages owned by Fannie Mae can also be cancelled at the borrower's request when the LTV reaches 75 percent based on the current value of the home as established by a new appraisal, provided that the borrower has a good payment history and that the loan is at least two years old. If the borrower does not request PMI cancellation, the PMI servicer must automatically cancel PMI on these loans when the LTV is scheduled to reach 78 percent, based on the value of the home at loan origination, provided that the loan is current at that time. For loans originated before July 29, 1999, which are secured by the borrower's principal residence or second home and that are owned by Fannie Mae, PMI will generally be cancelled at the midpoint of the loan term, provided that payments at that time are current.

Q: Hi Taylor, I would like to pay off my mortgage faster, and shorten the pay off time. What advice can you suggest for me? Sonya Oceanside, CA

A: Sonya, making bi-weekly (ocurring once every two weeks) payments can shorten the life of your mortgage and reduce your interest expense over the life of the loan. Instead of making a full payment every month, you make a half payment every two weeks. Since there are fifty-two weeks in a year, you make twenty-six half payments, or thirteen full payments. As a result, you are making one extra mortgage payment per year. Making bi-weekly payments can reduce the term on a thirty-year, fixed loan to approximately twenty-two years.

There are several ways to implement a biweekly program:

Locate a company that helps borrowers make bi-weekly payments. The company will deduct payments from your bank account every two weeks, but will only pay your lender once per month. The disadvantage is that you loose interest on your money that you otherwise would have made. The advantage is that it is convenient and automatic. Be sure to fully investigate the company's credentials. There have been scams reported in the industry.
Do it yourself. Open a bank account and make bi-weekly deposits. Each month, pay your lender from that account. You will earn interest on the money in your account.
Make monthly pre-payments. Increase the amount you pay each month by one-twelfth (8.33%). By increasing your mortgage payment by just over 8 percent, you shorten the life of your loan and save money effectively the same as you would with a bi-weekly loan.

Ask yourself some questions before committing in writing to a bi-weekly program. Remember, any loan is potentially a bi-weekly loan. If you have the discipline to make the extra payment per month or per year, why enter into a written agreement or pay someone to help you? If you use a third party to help you, ask what their set-up and monthly servicing fees are, then determine what you're really saving.

Q: Taylor, Is interest on a home equity line of credit deductible as a second mortgage?

Georgia

, Long Beach , CA

Georgia, Consult your tax professional to be sure, but it is my understanding that you can deduct home equity debt interest, as an itemized deduction. If you are legally liable to pay the interest, pay the interest in the tax year, secure the debt with your home, and do not exceed certain limitations.

Q: Taylor, will filing bankruptcy start me on a clean slate? Fred, San Diego , CA

A: No. Once you file for bankruptcy, every creditor that you bankrupted out on will be listed on your credit file for 10 years. If you can get credit at all after this, you will pay much higher interest rates for all of those 10 years. And with most lenders, you won’t be able to get a home loan for at least two years. If you are considering filing for bankruptcy, contact your creditors first to see what sort of compromise you can reach. Tell them that you would like to establish a plan to pay off your debt–and start at a negotiating percent, like 10% of the debt (you’ll probably have to go up to about 50%, but 10% is a good start). If they hesitate or begin to argue, inform them of your plan to file bankruptcy if an agreement can’t be reached. Bankruptcy means that they won’t get any money-this should make them a little more agreeable to reach a compromise.

Q: Taylor, my wife and I are curious about the interest only option. what is the interest only option again? Don, Los Angeles , CA

A: Hi Don! Good to hear from you again. The "Interest only option" (means the lender allows you to just pay the interest, and not the principal). The I.O. option is attractive for the MONTHLY SAVINGS, which you use for your home improvements. Each year you are paying very little to principal, so, many people prefer to take the savings and invest in the home improvements, and equity - where there is a better return on the money. Many of my clients follow this strategy where they use that interest only savings for other investments where there is a better ROI (return on investment) on the money. For instance, a new roof or pool for the home, which increases the home's equity / value by far more than the year end principal payments could have. Home improvements also increase your home's cost basis which helps you avoid capital gains tax. By doing home improvements with the interest only savings, it lowers your capital gains tax by increasing your home's cost basis.

Q: Taylor, What is a 1031 exchange, I am going to sell my investment property, and it has been only 1 year...what should I do? Perry, Santa Margarita, CA

1031 Exchanges For Investors

A 1031 tax deferred exchange is simply the disposition of one investment property to aqcuire a replacement property of like kind through a Qualified Intermediary and defer the capital gains tax due.

What qualifies as "like kind"?

For a 1031 exchange like kind means any property held as an investment can be exchanged for any other property also held as an investment. The only matter they have to be "like kind" is in the nature of their purpose to the owner.

What are the rules?

The two main rules are 1) the property must be "like kind" as defined above, and 2) the exchanger can not receive cash or other benefits without paying capital gains on this money

Do the properties have to be in the same state?

No, a property anywhere in the US can be exchanged for a like kind property anywhere else in the US

What is the time line?

The exchanger has 45 days from the date the relinquished property closes escrow to indentify potential replacement properties and 180 days to purchase the replacement property.

What are some reasons for doing a 1031 exchange?

The most common is to avoid paying a large capital gains tax bill. Other reasons include exchange a fully depreciated property for one that is not, exchange property that can't be refinanced (such as vacant land) for improved property to obtain cash, exchange non income producing property for income property, exchange into a higher cash flow property such as an apartment building into a retail shopping center, exchange out of state property for in state property, exchange for property with lower management responsibilities, exchange several small properties for one large one to reduce responsibilites, exchange one large property for several small ones to divide an estate.

Isn't there an exemption for Capital Gains?

Back in 1997, the tax code was changed to exempt the first $250,000 in profit ($500,000 for couples) as long as sellers live in the house for two out of the past five years. That means a couple who bought their house in 1999 for $200,000, for example, won't owe capital-gains taxes unless they sell it for more than $700,000.

Even if your home sale gains exceed the exemption amount, there are still some ways to lower your taxes. You can use any money you spent on closing costs when you bought the house (not counting points you may have already deducted) or home improvements to increase your cost basis, which in turn lowers your taxable gain. To qualify, the home improvements must add value to your home -- such as building a new room, a swimming pool or adding central air conditioning. Basic repairs don't count.

Q: Taylor, I have found a new home that I really like, and I don't want to lose it, but how can I possibly sell my home in 1 month...is there any interim loan that I can get to help me secure this home that I want to buy, as soon as my existing home sells? Raven, Los Alamitos , CA

A: Hi Raven! YES! Its called a BRIDGE LOAN and its a sensible loan option when you're buying and selling. Bridge the gap. There's no need to miss out on purchasing your new dream home just because your current residence is not sold. A bridge loan eliminates the worry of juggling two house payments. With a bridge loan, you can take advantage of the equity that's built up in your current home and use it as a down payment on your new one!

For some home buyers, purchasing a new home involves selling an old one. That's why some people look for a "bridge loan" to bridge the gap between the two transactions.

Terms of a bridge loan can be different from lender to lender. Some are setup so that they completely pay off the old home's first mortgage, while others pile the new debt on top of the old.

You're thinking of buying a house so you go out with a real estate agent and find the perfect "move-up" home. You fall in love with it. You present an offer. The only problem is that you need to sell your house in order to buy that house. Quite a perplexing dilemma! As you have yet to even put your house on the market yet. And you need the money for the down payment.

So you make a "contingent" offer. What is a contingent offer ? Well...Your offer to buy is contingent upon your ability to sell your house in time to close. Since you haven't even listed your house yet -- That's a little bit "too" contingent for most sellers nowadays. They are likely to turn you down.

In hindsight, you realize you should have listed your house first, got an offer (and accepted it), then gone out looking for a new home with money in your pocket.

But it's far too late for that and you really want that house.

The real estate agent suggests you get a "bridge loan." If you have enough equity built up in your existing home, this is a special loan that allows you to get some cash so you can make a down payment and buy the new home. Interest rates are generally high, points are high, and there are costs and fees involved. So its always best to try and avoid this route if you can.

It's cheaper to borrow from your 401K or relatives.

A typical bridge loan might be structured as follows:

The loan is used to pay off the existing mortgage, and the remaining money -- minus closing costs and six months prepaid interest -- is used as a down payment on the new home.
If, after six months, the old house still is not sold, the borrower will begin making interest-only payments on the loan
The loan has a term of one-year.
When you sell your current home, the bridge loan is paid off. If it is sold within the first six months, any unearned interest payments will be credited to you.
The mortgage on the new home must be financed by the same lender who extended the bridge loan.

I can secure a Bridge loan for you.
You'll enjoy these benefits:

No contingency clause needed in your purchase offer
Interest-only payments, either quarterly or deferred up to nine months
Payment deferral allows qualification based only on new home mortgage
Loans up to 85% of current home value
One-year term available if the bridge loan is used in conjunction with a construction loan
Bridge Loan Example & Worksheet

How much can I borrow?
To see how bridge loans work, look at this example and try it on the worksheet below.

Current home value $150,000
Multiply by 85% x .85
Bridge loan amount $127,500
Less existing mortgage balance(s) -$75,500
=======
Equity available for down payment on new home $52,000
New home sale price $200,000
Down payment (from above) -$52,000
=======
New loan amount $148,000

Q: Taylor, Do you guys land / construction loans and if so, do you have any information for me on that? Pedro, Los Angeles , CA

A: Hi Pedro - here is some good info to get you thinking in the right direction so you know what kind of land to buy and what you can reasonably expect as you get started in the process of buying land, and building on it.

Land Financing Budget (Example):
Land Purchase Price $300,000 Land Purchase Price
Soft Cost of Construction $ 40,000 Plans and Permits
Hard Cost of Construction $350,000 Construction Costs
Closing Costs $22,000 Fees, Title, and Escrow.
5% Misc. Reserve $17,500 5% of Construction Costs
Loan Interest Reserve $35,000 Interest On Amount Drawn
Total Building Cost $764,500
Appraised Value $800,000 Estimated Value of Land with Building Completed
Down Payment $191,125 25% of $764,500

I would be able to help you with the Assessment of the estimated yearly taxes, insurances, and HOA fees. Approximate interest rate for the loan. Down payment required. Interpretation of your personal financial statements, credit scores, and income-to-debt ratios to conclude your eligibility. You would need to consult with your real estate agent for the specifics of the land purchase contract, i.e. terms of the purchase.

One of the important things to be thinking about when it comes to buying land and building a new home on it, is saving money on your escrows. You'll want to do a 3 in 1 construction to permanent loan if you can, this way you will avoid paying for three escrows. You need to have all your ducks in order, thats the hard part. Most people don't.

Here is some information on the Construction to PERM loan programs I can obtain.... the best part of these loan programs is that while you are building the home,  you don’t have to worry about making the payments, because this lender will build the payments into the loan during the construction phases. You will submit invoices to the lender and then they will dispurse the payments directly to the construction vendor, on an invoice by invoice basis. Before you even start looking into any of this, be sure to see if you can even find the land at a reasonable price, most tear downs - especially in CA, are so expensive, that it makes the whole venture impossible. or.. close to impossible.

Assuming you have found a reasonably priced tear down, or lot, I have a lender that can actually do all three transactions all at once...from the Lot loan, to the construction loan, to the permanent loan. If we do it this way, all at once, we need a 60-90 day escrow, we need all the plans, and the builder to be in place.

here is an example of how it will work if you are buying a tear down just for the land:

You will purchase the house, and tear it down...to build a  3000 sq ft home.

Borrower:  Client
FICO score: 700
Liquidity: $20,000 (cash, stocks/bonds, 401K's, etc)
Property address: TBD
Purchase of the lot: $ 450,000
Down payment on Land: $ 90,000 or 20% down If you dont have the 20%, you can buy the tear down, and then wait for the home to appreciate over a year.
Land balance: $ 360,000

Will build a  3,000 sq ft house - ADD UP ALL COSTS BELOW TO ARRIVE AT TOTAL LOAN COMMITMENT (to buy out Land Loan)

Estimated cost per square feet: $ 100.00

Construction costs: $ 300,000

Land payoff balance: $ 360,000

Construction reserves: $ 33,000 (generally 5% of CONSTRUCTION COSTS + LOT LOAN (LAND) BALANCE

Interest reserves: $ 33,000 (5%) (this pays the mortgage interest payment each month until the project is complete.)

Total new loan commitment: $660 K (20% down = $ 132,000 ) Subtract  $90K that we already have into the deal with land loan down payment ( $90 K) = remaining funds needed - $ 42,000 . (or just $ 132,000 if we want to do this deal all at once.)

If the land hasn’t been owned for more than a year...then we can take the LTV approach, and not the loan to cost approach.

Estimated value when completed: $700,000 - $1,000,00 Estimated time to complete the construction: 12 months + 3 free months

I revisited the cash-to-close concept due to the scenario. Most lenders want a combined twenty (20%) percent of the construction costs, land and reserves. Initially you got the land loan with 20% down. Now you will need to get a new loan for the construction phase of the home, this means the lender will want twenty (20%) percent of the construction costs, land and reserves.    If you don't have the 20%, you can buy the tear down, and then wait for the home to appreciate over a year.

The interest reserves which is built into the loan will make your monthly interest payments. You are charged interest only during construction on the money you use. If you do not use all the money approved for, then we will reduce your commitment once, the construction is complete. For example, if you borrow $2,090,000 and use $2,000,000. We will reduce your permanent loan $90,000.

Construction loans are typically prime plus or minus 1.

Construction loan RATE: 7%
Loan Amount: $ 660,000
PAYMENT: $4391

I will need the following:
___1. Application (emailed to you);

___2. Credit report (I'll run);

___3. CPA's letter stating you have been in same line of work 2 years or more;

___4. Proof of assets (two months bank statements will all pages, 401K's, stocks/bonds, etc.)

___5. Appraisal (I have an appraiser approved by Countrywide & Landsafe Appraisal. You will need to pay him direct);

___6. Field Review(Same as above);

___7. Title - I will order;

___8. Escrow - I will open;

___9. Contractor Review form (see attachment);

___10. Contractor proof of general liability (.5m & 1m aggregate), workman's comp and photo of license;

___11. Line Item Budget (see attachment);

___12. Course of Construction insurance (contact your insurance carrier);

___13. Expenses-to-date for soft costs and proof of payment (front and back of checks);

___14. One (1) set of the plans with specs (give to appraiser);

___15. Signed contract to match line item budget between contractor and you;

___16. Complete copy of the Land Trust agreement with all pages;

___17. HUD 1 settlement statement for purchase of the land;