Get the latest market updates with Brian and David Wickert, mortgage and realty experts with insights on trends, rates and more.
This week on the Accunet Radio Show:
Join Brian and David as they explain reserve funding, give you an overview of today’s housing market in SE Wisconsin, and follow up on last week’s story of a failed experience with Rocket Mortgage.
This week’s highlights
- In addition to a down payment, certain loan types require extra cash before closing — namely when purchasing duplexes, secondary residences, investment properties and when applying for a jumbo loan.
- The buyer doesn’t always have to cover the closing costs; down payments and closing costs can come from any family donor — parents, siblings, even cousins.
- Single-family detached home sales in the 5-county metro Milwaukee area are up 1.7% compared to 2018, while condo sales are down 10.3% year-over-year.
The market in SE Wisconsin — Flash report
We’re in the midst of the summer housing market, which is real estate’s peak season. Our data is taken from the NMLS, of which Brian is a card-carrying member.
- Single-family detached home sales
- Sales down by 9% compared to June 2018
- 195 less homes sold
- Median sales price is up 6% YOY, sitting at $255,000
- Listings are up 1.1% YOY
- Condo sales
- Sales down 10.3% YOY
- Median sales price is up 10.2%, sitting at $193,950
- Listings are down 10%
What are reserves for a mortgage?
A reserve is extra money that you need in addition to the down payment at the time of purchase. It proves that you can not only afford the home but also afford to make payments in the first few months of residency.
What happens to the reserves? Does it go into a lockbox? An escrow account?
The money doesn’t really “go” anywhere. You just need to prove that you have it. And, if you’re getting it from a gift, you have to prove that you have it prior to closing by depositing it into an account. (Also, if you’re making a down payment with gifted money, you need a formal gift letter.)
Other types of loans that require reserves
Not all home purchases require you to have reserves in order to close — usually, it’s only a requirement with higher-risk loans, such as:
- Duplexes — Fannie Mae requires 6 months’ worth of monthly payment reserves
- Secondary Residences
- Investment properties
- Jumbo loans — AKA loans at or above $484,350
Why do duplexes require so much in reserves?
Simply put, duplexes are a greater risk to mortgage lenders than a normal home purchase. Rental income is used to qualify, and since rent isn’t guaranteed until the lease is signed, there’s always the chance you could be without it for a few months. To feel comfortable distributing a loan, the lender needs to make sure you can withstand being without rental income for 6 months, if necessary.
Don’t just find a house; Find your home with Accunet Mortgage.
Client update: Buying a home while self-employed
We recently came into contact with a client who has been working for her relative’s brokerage for about two years, and is now interested in buying a condo. During that time, he was a W-2 employee of the company. Then, about a year ago, they got their real estate license in order to be a more functional assistant — they didn’t really have any intention to use the license; they just got it as a form of professional development.
Brian has a theory that every real estate broker looks at a real estate license, and says, “Ah, we don’t want you anymore. We don’t want that responsibility,” because once they’re licensed, the larger broker is responsible for any mistakes the agent makes.
When the client brought in their tax returns for the condo purchased, we noticed it was split between a W-2, which is considered normal, and a 1099, which is used for freelance or contracting work. Our guess is, after they got their license, their employer switched their status to be contracted to avoid liability, despite the fact that they’re performing the same exact job. So, from a mortgage lending perspective, the client is buying a home while self-employed.
Usually, you’d have to be self-employed for 2 years with a record of reliable income before Fannie Mae will even consider lending to you. But, since this isn’t your typical high-risk situation, we decided to reach out anyway. We’ll keep you updated on the loan as the situation unfolds.
Client update: Burned by the Rocket Part II
Last week, we updated you on a client who initially tried to borrow through Quicken Loans (AKA Rocket Mortgage), and was denied at the last second after they already had an accepted offer.
Originally, she wrote her offer with no financing contingency — in fact, she wrote her offer autonomously, which is the lending equivalent of performing heart surgery on yourself. She could’ve used the “no loan” excuse to get out of the contract, but that would’ve eaten her $5,000 contingency, which, at the time, was unaffordable. Little did she know she was on the hook for even more than her contingency. Accordingly to lines 281-283 on her Offer to Purchase, if the buyer (her) defaults, the seller may terminate the offer, and:
- Request earnest money as liquid damages
- Sue for damages
What does it mean to sue for damages?
In real estate, this means the initial buyer (who defaults on the purchase) is responsible for paying the difference if the house sells for less than what the original offer was. So, for instance, if a buyer defaults on an offered $200,000, and the house is then sold to a different buyer for $190,000, the original buyer could be held liable for the $10,000 loss.
Initially, we thought there was nothing we could do to help, but after connecting her with one of our most experienced loan consultants, Jaime Suro, guess what? We got an approval.
The flaw was that I thought, in addition to the down payment, the buyers had to have a few months’ worth of payments known as “reserves” since it’s a duplex. Lo and behold, the reserve money (which is just $18,500) in addition to a down payment can come from a gift from a relative (in this case, her parents). Shout-out to the good folks at WHEDA and their underwriter Mike Moretti (check spelling) who stayed late on Wednesday to issue the approval.
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