How to Finance a Vacation Home That’s Also a Short-Term Rental

This was posted in the Wall Street Journal:

 

Renting out a second home is one way to pay off the mortgage while leaving time for family fun

By
Anya Martin

The rise of short-stay rental sites like Airbnb and HomeAway is tempting homeowners to purchase vacation homes that will also generate income.

For some, renting is a way to recoup some costs of a second home purchased primarily for family fun. Others do the math and find it makes sense to rent full time or close to full time.

Rental income can also defray the cost of improvements if the second home is a fixer upper, says Brian Sharples, CEO of HomeAway, which has more than 1.2 million paid listings in 190 countries. Vacation homeowners make an average of $28,000 a year in rental income, according to results of a quarterly survey released in March of 1,253 owners who list on HomeAway.com, VRBO.com and VacationRentals.com.

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In a separate annual HomeAway survey released in June, 70% of 663 respondents said rental income covered more than half of their mortgage payments. Fifty-four percent said rental income covered 75% or more of their mortgage payments. Owners also used the income to fund their everyday living expenses (23%), upgrade and renovate the property (23%), pay for a child’s education (21%) and save for retirement (11%).

Last year, the average purchase price for a vacation home in the U.S. was $192,000, according to the National Association of Realtors. Of the 920,000 vacation homes sold, 61% were financed with a mortgage. ( News Corp, which owns The Wall Street Journal, also owns Realtor.com, the listing website of the National Association of Realtors.)
Overall, home prices have been rising over the past few years in most vacation hot spots. But buyers also should consider that interest rates are low, says Don Ganguly, CEO of HomeUnion, a California-based residential investment and management firm. “It could be the perfect window to blow cheap money into an area that is doing well and rents are going up,” he adds.

Buying a property solely for rental income has its risks. And how the property is used affects the borrower’s mortgage options. Both conforming and jumbo mortgage rates for a second home usually are equal to or within a quarter of a percentage point of current market rates for a primary residence mortgage, says Norman T. Koenigsberg, president and CEO of East Brunswick, N.J.-based First Choice Loan Services. Lenders typically require a minimum down payment of 10% for conforming loans and 20% for jumbos on second home mortgages, he adds.

Also, the lender will factor in the borrower’s existing home payments as well as the new mortgage payments when calculating the debt-to-income ratio, which reflects the borrower’s monthly debt payments as a percentage of gross monthly income. Lenders prefer a ratio that is 43% or lower, but some will go up to 45% for an otherwise strong applicant, Mr. Koenigsberg says.
However, if an owner plans to rent the home most of the time, a lender will categorize the property as “investment,” making it ineligible for a second-home mortgage, says Dave Gorman, Bank of America sales executive for the Northwest region. Qualification guidelines are tighter for investment-home mortgages, including a higher minimum credit score, higher down payment (25%), and a lower DTI, he says.

On the plus side, projected rental proceeds may be included in income calculations for an investment-home loan, Mr. Gorman says. If a home hasn’t been previously rented or is a new property, the lender will consider comparable rental income for the area, he adds.

Here are a few more considerations:

• Local regulations. Some counties and municipalities consider vacation-home rentals the same as hotel stays and require owners to collect occupancy or lodging taxes from guests. Communities also sometimes limit the number of homes that can be rented on a temporary basis, so vacation-home buyers who intend to rent should check for any local restrictions before purchasing, Mr. Gorman says.

• Budget fully. While borrowers may be able to afford another mortgage payment, they should be comfortable paying for the property taxes, insurance and upkeep of any property they own and finance, Mr. Gorman says. Remember these expenses remain even if there are no renters, he adds.

• Repair and write off. If the vacation home is rented, expenses related to repairs, maintenance, cleaning and utilities may be tax deductible, either fully or prorated based on the time it’s rented. However, costs for improvements must be capitalized and then depreciated. Check with a tax expert for specific rules and restrictions.

Corrections & Amplifications:
Investment-home mortgages may require a higher down payment of 25%. An earlier version of this article incorrectly stated the down payment could be 75%. (Aug. 3, 2016)

Homebuyers May Benefit from Stock Meltdown

This was sent to us by Tammy Pollard, Sr. Mortgage Advisor with Paramount Bond & Mortgage Co, LLC

Despite the facts that the Federal Reserve recently raised interest rates, U.S. stocks are tumbling and new worries about the Chinese economy seem to emerge daily, there is still a positive outlook for homebuyers.

All the worries about China that have assaulted the U.S. stock market in early 2016 have done the opposite for bonds. More money pouring into Treasurys has driven mortgage rates to a two-month low. A 30-year mortgage slipped below 4% in mid-January.

The housing market had already been steadily gaining ground even before the latest drop in rates. Actually, it’s been one of the strongest parts of the economy over the past year. Sales of new and previously owned homes are likely to finish 2015 at the highest level since before the Great Recession.

What’s more, the number of permits to build additional homes is on track to reach an eight-year high. Work on new construction is forecast to rise to a 1.19 million annual rate in December from 1.17 million in the prior month. Starts will top the 1 million mark for the second straight year. Just six years ago, builders were producing fewer than 600,000 new homes a year.

Sales of existing homes, meanwhile, are expected to hit a 5.15 million annual rate in December and finish the year about 25% higher compared to the post-recession low. Most economists predict new construction and sales will increase again in 2016, aided by a much improved labor market.

The Fed raised a key short-term rate in December for the first time in nearly a decade, and the central bank is widely expected to push rates even higher in 2016. Yet so far that hasn’t translated into upward pressure on long-term Treasurys or home mortgages. Right now investors are more worried about whether a slowing Chinese economy will hurt the rest of the world.

The higher cost of buying a home could act as another repellent. Prices rose in 2015 to levels last seen shortly before the onset of the Great Recession in late 2007. An expected increase in home construction could make it easier for buyers, though. Permits for new construction in November, for instance, were almost 20% higher compared to the same month in 2014. A greater supply of homes for sale would help hold the line on prices.

2016 Home Sales Will Be Best in a Decade, With Surprising Hot Spots, Realtor.com Predicts

CNBC

December 2, 2015

Total homes sales next year are expected to reach the highest levels since 2006 on the back of new construction and the existing housing market, Realtor.com reported Wednesday.

The report contains several surprises. Among them, Providence, Rhode Island, ranked as the hottest market for 2016, and millennials are expected to make up the biggest demographic of homebuyers next year.

Sales of existing and new home sales are expected to reach 6 million for the first time since 2006. The pace of growth of existing home sales and prices is expected to slow to 3 percent but remain strong overall. Meanwhile, new home sales are seen increasing 16 percent.

Realtor.com anticipates new home starts will increase by 12 percent.

And those new homes are becoming more affordable, Realtor.com Chief Economist Jonathan Smoke said Wednesday.

“What you’ve seen in the last couple of years is that builders have been avoiding that more affordable entry-level price point,” he told CNBC’s “Squawk Box.”

“We’re already seeing movement. Last week’s report on new home sales showed that the median new home price is finally coming down, and that’s a good sign that builders are positioning communities and product for a more affordable price.”

That is helping to draw in millennials, who are often viewed as absent from the housing market.

Americans ages 24 to 35 accounted for 30 percent of the existing home sales market in 2015, according to National Association of Realtors data cited by Smoke.

“That’s higher than it has been the last couple of years and trending towards normal, which is more around 36, 37 percent,” he said.

Smoke noted that Realtor.com’s top 10 hottest housing markets for 2016 contained other surprises, in addition to top-ranked Providence: St. Louis; New Orleans; and Virginia Beach, Virginia.

While all the areas on the list have strong economies or improving prospects, those four areas are about four years behind other markets in the recovery, and their economic outlook for 2016 is particularly strong, Smoke said.

How to Survive the 4 Common Mortgage Killers

A lot of detailed documentation is required when applying for a home loan these days. You can expect to show everything from full tax returns, pay stubs, bank statements, to letters of explanation regarding credit, debt, income and assets. However, that leaves quite a bit of room for challenges to pop up. Here are four common roadblocks you may encounter in the mortgage underwriting process, and how you can fix them:

1. Changes in Your Income

Let’s say the underwriter determines – based upon your pay stubs and tax returns – that your income is lower than what the loan originator said it was. An easy way to offset that is a written verification of employment (VOE), which specifies and breaks down your income. This is especially important if you’re an hourly wage earner with fluctuating income – such as varying hours worked, bonuses, or overtime – that has not been consistent for most of the past two years.

2. Your Debt Eats Up Too Much of Your Income

You might encounter a problem if your consumer debts, such as student loans, credit cards and car loans, are just too large for the mortgage amount you’re applying for. If your debt-to-income ratio exceeds 45%, to still qualify, you’ll need to make a change in any of the following ways:
a. Reduce the payment on the mortgage
b. Reduce and/or remove the payments on the consumer loans
c. Re-evaluate the income

3. Paying Off Your Debt… the ‘Wrong’ Way

When you pay off consumer debts to qualify for a mortgage, the account(s) must be closed as well. This can be a problem, as closing credit cards can have a negative impact on your credit score.

An alternative option involves getting an updated credit report that shows that the debts are paid off in full without any payments due. The key is to make absolutely sure each creditor whom you paid off in full specifically reports to each credit bureau a zero balance and a zero payment due.

4. Negative Events on Your Credit Report

Lenders run each borrower through a comprehensive background screening through multiple fraud databases, which would identify any other problems that may arise – such as a short sale or any property you were tied to in the past seven years. If any other unaccounted-for properties pop up, documentation will be required to either show the property is no longer yours, or it was sold, or the carrying cost of that property would be factored into your debt-to-income ratio.

If you are not sure about something financially related to your loan application, just be sure to ask your Paramount mortgage banker. Should any unforeseen roadblocks pop up in your mortgage loan process, call your loan officer right away to explain the situation and get a read on what type of documentation will be needed to satisfy the condition and/or the problem. Our experienced loan professional can guide you through to a successful closing.

7 Renovations That Reduce Your Home’s Value

Most people think home-renovation projects will always add value to a home, but this isn’t necessarily true. According to Scott McGillivray, host of the HGTV series Income Property and author of How to Add Value to Your Home, these 7 renovations should never be done…

1. DO NOT expand your master bedroom if that means eliminating another bedroom. Small master bedrooms are a common complaint, particularly in older homes. But in many cases, the only realistic way to expand a master bedroom is to sacrifice one of the home’s other bedrooms, which is likely to be a costly mistake. Fewer bedrooms equals fewer potential buyers.

2. DO NOT convert a garage into living space. Finishing a garage can seem like a cost-effective way to enlarge a home-it is significantly less expensive than having an addition built from scratch. Trouble is, many buyers will not even look at properties that do not have garages.

3. DO NOT add artistic flourishes or personal touches to the home itself. The smart way to add art and/or personality to a home is to hang art on its walls, not to alter the home in ways that can’t be easily undone when it is time to sell, such as a mural painted on a wall or ceiling, a large masonry fountain in the yard, or a mosaic artwork incorporated into the tile in the kitchen or bathroom. Buyers want a home to be a blank slate for them to fill, not a reflection of a prior owner’s tastes.

4. DO NOT paint interior walls dark colors. Dark interior walls have become a trend – decorators will tell you that they can make rooms feel cozy and ¬elegant. But many home buyers think “small and unwelcoming” when they walk into a dark-walled room. Light-colored walls might not be trendy, but they make spaces feel larger and friendlier, which buyers value more than -stylishness.

5. DO NOT attempt do-it-yourself home repairs if the result will look like ¬do-it-yourself repairs. Home owners who have the skills to do basic home repairs can save themselves thousands of dollars over the years. But when home buyers (or home inspectors) see evidence of do-it-yourself work, they often start to worry about what else the home owner might have done on his/her own that isn’t so evident-such as electrical and -plumbing work or foundation work-and whether this work was done properly. Potential buyers feel much more confident when it appears that a home has been professionally maintained.

6. DO NOT texture interior walls and ceilings. Drywall compound can add texture to interior walls and ceilings, resulting in a stucco look. This textured look goes in and out of style and might not be in vogue when you sell.

7. DO NOT install a chain-link fence in your front yard. These look low-end and unwelcoming, giving potential buyers a negative first impression of your home. If you must have a fence, it’s worth paying extra for wood (or composite or vinyl fence designed to look like wood). These can cost twice as much as chain link, but they will not reduce the value of the home – a nice wood picket fence could even increase the value.

Mortgage Financing

Mortgage Financing – How Much Can I Afford?

Thursday, March 7, 2013, by Sean Keeley

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[Illustration by Eric Lebofsky]

Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a house or apartment. Additional questions welcomed toseattle@curbed.com. Today, Residential Mortgage Advisor Dan Keller walks us through the process of determining how much you can afford when it comes to mortgage financing.

“How much can I afford” is one of the most common questions that home buyers ask. I look at the affordability process a little different than some mortgage brokers that simply use an online affordability calculator. I prefer the long-hand approach and start with one main question:

“How much do you WANT to afford?Meaning, what level of mortgage payment are you comfortable making each month?

I start with evaluating the borrower’s current rent, income, debt and lifestyle, and then from there, establish affordability ranges. This approach leads to a lower default rate in my office and helps prepare the borrower for the responsibilities of home ownership, while at the same time, using their mortgage as a financial tool.
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So What’s Next?

After an initial mortgage budget is determined, I like to find out how much money the borrower plans to use for a down payment. At this point, I am now ready to solve for a sales price and present mortgage options through a mortgage planning analysis (see the video below for an example of a mortgage planning analysis by Dan Keller).

Determining the Best Loan Program – After reviewing the mortgage planning analysis, you should have total clarity in regards to how much money is required for your down payment, what your total monthly payment will be, the closing costs associated with the loan, as well as the details surrounding the loan program such as the Private Mortgage requirements and qualifying guidelines.
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Qualifying For the Mortgage Program You Select

Over the years, I’ve documented exactly what it takes to Ace Your Mortgage Application, and in my office, we call it the Perfect Mortgage Approval Process. If you follow the information below, should breeze through the mortgage process and right into your new home!Know Your Credit Score – Most banks today require a 640 credit score to qualify for a home loan. Our bank for example, will go as low as 620, and will make case-by-case exceptions down to 580. It’s important to understand that the interest rate you get is directly related to your credit score. If you have missed the mark on your credit score, I highly recommend getting started with a credit restoration program (I can refer you to a company that I use).

Documenting Your Employment History – As a first time home buyer, your approval will be based on your ability to prove your employment history. Banks require a 2-year consistent work history. If there are gaps in employment, they will need to be addressed and supported. In most cases, a bank will need to see that you have been back to work for 6-months to date. Another common question asked pertains to job transfers. It’s ok to transfer employers, in that case, you will need to provide a job offering letter, written verification of employment and in most cases, at least one pay stub helps.

Supporting Your Income – This is where most trains get derailed in the mortgage approval process. Just because you “made” $82,000 last year per your tax returns, doesn’t mean that your qualifying income is $82,000. Overtime, bonuses, and write-offs are all factored into the qualifying income matrix. In my office, we order a written verification of employment as we review your tax returns and pay stubs upfront so that we are 100% correct in determining your qualifying income. I like to say, “We think like underwriters”.

Verifying Your Down Payment – This is a process of reviewing your bank statements, 401k accounts, or any investment accounts that may be leveraged to provide down payment funds. In many cases, Gift Funds are allowed for a down payment, however, you need to understand how to properly source your gift funds when applying for a mortgage.

Choosing the Right Real Estate Agent – Now you are ready to purchase! It’s crucial, now that you’ve done everything that you need to do in getting your financing in order, you need to find the right agent that is qualified to serve you and your home buying needs. I recommend a couple of things in selecting a real estate agent in your community:

(1) Go to Google and search. Get detailed in your search – “Wallingford Seattle Real Estate Agents” or if you are looking at specific homes, I’d search, “Craftsman Homes for Sale in Wallingford Seattle”. You have a better chance of selecting a specialist versus a “jack of all trades” real estate agent.

(2) Visit open houses. This is a no-obligation opportunity to interview agents. Plus – if you were to sale your home some day, you’d want an agent that has a listing inventory and actually works their open houses.
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The Secret Sauce – Know Before You Owe

Everything that you need to know about getting approved for a mortgage and buying a home can be found right here in our Mortgage Concierge Packet. Also – you can visit my Perfect Mortgage Approval Process and preview a 4-part short video series on How To Ace Your Mortgage Application.

As always, I love helping my readers, so please do not hesitate to contact me directly at (425) 350-7136 if you have any questions!

One last thing, if you liked this video and post, please feel free to share it for me. Thank you!