Monthly Archives: May 2012

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Due Diligence Period and Due Diligence Fee in North Carolina

Having spoken with people who bought a house prior to July 2010, it is clear that a large portion of the public is not familiar with North Carolina’s “due diligence period” and “due diligence fee”.

Prior to July 2010, when buyers put an offer on a house they would offer an earnest money deposit, usually around 1% of the purchase price.  This deposit showed the buyer’s good faith and seriousness in wanting to buy the property.  However, this system was tested in the event of a problem-filled home inspection.  If the buyer felt that the home inspection turned up too many problems for them to handle and wanted to walk away, the earnest money came into question.  Would the buyer recoup his earnest money since it was not his fault that the house had so many problems?  Or would the seller be allowed to keep the earnest money to compensate them for their lost marketing time?

With the installment of the due diligence period and due diligence fee, this was no longer an issue.  The due diligence period is a period of time that the buyer gets in order to order a home inspection, finalize financing, and make any repairs negotiated between the buyer and the seller.  Because the seller is taking his house off the market for the buyer to do his due diligence, he is compensated with a due diligence fee.  The due diligence fee is similar to earnest money, but it is a smaller (negotiable) amount roughly equal to the amount the seller would be paying in mortgage for the length of time. There is still an earnest money deposit under this system, but it is usually calculated by taking the 1% of the purchase price that would have been the deposit under the old system, and subtracting the amount already paid for due diligence.

The due diligence fee is never refundable, and the seller may cash it immediately upon receipt.  Before the end of the due diligence period, the buyer may walk away from the contract for ANY OR NO REASON.  They will of course lose the due diligence fee because it is nonrefundable, but they will recoup their earnest money.  The buyers may decide that there were too many repairs needed on the house, or they may simply change their mind.  This system protects the seller because the seller is compensated for the time off the market, but it also gives freedom to the buyer in that the buyer does not have to worry about losing a large earnest money deposit if he chooses to walk away for whatever reason.

 

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Reflection on Today’s Real Estate Market

It’s really interesting how the real estate landscape has changed over the past few years.  In 2006 houses were being sold left and right, and for more money than ever before.  People touted real estate as an investment you could never go wrong with because it was perceived that prices only ever went up.

Now we know that’s not the case.  Like any market, there is fluctuation in the real estate market, and we learned that the hard way when the real estate market crashed in 2008/2009.  But real estate is still a relatively safe investment, because if you hold the property long enough it will increase in value and keeps pace with inflation.

The housing crisis has changed the way we do business.  Prior to the crash, there were roughly 11,000 Realtors® in Charlotte, and today there are roughly 7,000.  Business seemed to be falling from the sky before the crash, and now business is creeping upward.

The housing crisis also changed the type of business that we do.  In real estate school they teach you how to write a contract on a resale property.  Today an agent’s first transaction is likely to be a foreclosure or a short sale, and those topics aren’t covered at all in pre-licensing classes.  Nowadays many agents take classes to get a designation as a Certified Distressed Property Expert, because the need is so great and it is impossible to avoid them in doing business in today’s market.

Slowly but surely the real estate market is healing.  In Charlotte we are seeing a 7.2% year-over-year increase in closed real estate sales, and the amount of inventory has decreased 22.9% from last year.  As there are fewer houses on the market, the demand increases, and we are seeing houses sell more quickly this year, and some with multiple offers.  What hasn’t followed yet is prices.  First we will see shorter time on the market, and eventually that will translate to higher sales prices.  In the meantime it remains a great time to buy a house with high affordability, low interest rates, and foreclosure and short sale opportunities.

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9 Things You Need to Know about Qualifying for a Home Loan

1. Ability to Qualify

When determining your ability to qualify for a mortgage, lenders will take into account your employment security, your credit score, your income, and your debt-to-income ratio.

2. Employment

To qualify for a home loan, most lenders require that you have been in your current job for at least two years.  If you are considering buying a home, don’t change jobs, especially to one in a different industry.  Lenders want to see that your employment is stable and that your income is not likely to decrease.

3. Credit Score

For a conventional loan, most lenders require a minimum credit score of 660.  For FHA, the minimum is generally 640, though a few lenders will accept a score of 620.  If you are below this level, you must raise your credit score before you can qualify for a loan.  If your score is above 720 you should have little problem qualifying for a loan if you meet all the other criteria.  Make sure you are doing everything you can to maintain your credit score.  Don’t apply for new credit, such as a new credit card or car loan, as the inquiries on your credit will cause your credit to drop temporarily.

4. Debt-to-Income Ratio

Your income will determine what kind of a monthly payment you can handle.  For a conventional loan, lenders use ratios of 28% and 36%.  Your monthly housing payment on your new home, including HOA dues, may not exceed 28% of your gross monthly income.  In addition, your housing payment plus your recurring monthly debts must not exceed 36%.  These debts include car payments, credit card balances, student loan payments, personal loans, and alimony/child support.  These ratios will be higher for FHA, VA, and USDA loans.  Bottom line: if you are preparing to buy a house, do not incur new debt such as financing a new car or furniture/appliances.

5. Interest Rate

The interest rate you get will depend on the prevailing rate on the day that you lock in your rate, the length of your repayment, the type of loan you are securing, and your credit score.  Interest rates will be lower for shorter repayment terms.  For example, as of today, the interest rate for a 30-year fixed rate mortgage is 3.875%, but the rate for a 15-year fixed rate mortgage was 3.00%, according to Wells Fargo. Of course, if the term of repayment is shorter, your monthly payment will be higher.  With respect to types of loans, FHA loans tend to offer lower interest rates than conventional loans.  According to Wells Fargo, the rate for a 30-year fixed rate conventional loan is 3.875%, but for a 30-year fixed rate FHA loan it is 3.75%.  However, sometimes the cost of an FHA loan is more in the long run, depending on mortgage insurance.  Interest rates are also dependent on your credit score.  If your credit score is lower, you will likely receive a rate that is higher than the quoted daily rates.

6. Avoid Red Flags

When gearing up to buy a home, avoid red flags such as large cash deposits.  If you cannot show a paper trail of where the money originated and how it got into your account, this may hold up the loan process.  For example, don’t sell cars for cash; make sure you receive a check or a cashier’s check.

7. If Your Job is Commission-Based

Be sure to keep your pay stubs and W-2s.  If your job is commission- or bonus-based (i.e. you do not receive a consistent monthly salary), the lender will determine your income based on your average income over the past two years, as determined by your W-2s.

8. If You Have a Bankruptcy in Your History

If you have ever filed for bankruptcy, you will not be able to qualify for a loan until 2 years after your bankruptcy discharge date.  As bankruptcies hit your credit score, make sure you are also doing things to repair your credit, such as establishing positive payment history and keeping low credit balances.

9. If You Have Ever Had a Foreclosure or Short Sale

If you have ever had a foreclosure, you will not be able to qualify for a mortgage until at least 3 years from the foreclosure sale date.  The waits range from 3 to 7 years, depending on what type of a loan you are applying for, with FHA having the shortest wait.  If you had a short sale and did not default on the mortgage, you will be able to apply for an FHA loan immediately.  If you did default on the mortgage, you must wait 3 years for an FHA loan.  For a conventional loan, the wait ranges from 2 to 7 years, depending on how much your down payment is and whether you can show extenuating circumstances.

For more information, feel free to ask me or consult the Valeo/Croy Team’s New American Mortgage blog.