A purchase agreement is an essential step in the real estate process. The purchase agreement outlines prices and terms for a real estate transaction. The goal of the purchase agreement is to protect the buyer and to ensure that all expectations are clear and understood.
While purchase agreements can vary from place to place, the one constant that I have found in my more than two decades as a residential lender is that a home buyer should always have a professional in their corner to pen the purchase agreement on their behalf. Realtors drive the loan process through the purchase agreement. Here are some key elements of a purchase agreement that have a significant impact on residential lending.
ODD DAYS INTEREST
Odd-days interest (or interim interest) is the term used to describe interest due on a mortgage to cover an initial, partial month payment before regularly scheduled payments begin. Typically, most mortgage payments are due on the first of every month. However, mortgage closings may occur on any weekday during the month resulting in odd-days interest payments.
On purchase transactions odd days interest is calculated from the date of the closing to the end of the month. For example, if you close on March 29th, you will pay interest at closing covering March 30th and March 31st. Your first monthly payment will be due pays the interest for the full month of May. If you close the first week of March, you may have a choice to pay odd days interest at closing for the rest of the days in March, with the first regular payment due May 1st, thusly increasing your funds to bring to the closing table. Alternatively, you can close the first week of March (as long as it is before the fourth day) and receive an interest credit at closing and the first monthly payment would be due April 1st. In this case, the funds required at closing would be lower.
ON OR BEFORE
Inspection and Due Diligence Period
If you submit your clients offer today and give the seller the typical 48 to 72 hours to respond three days have passed. Subsequently, If you have an inspection period of 14 days more than two weeks have passed since your client went under contract. Throw in additional days to negotiate the inspection items between your client and the seller. Lastly, the seller may need time to remedy the agreed upon inspection items. As you can see, the inspection process may take the greater part of a month if you plan to close at the end of the month.
Most residential mortgage lenders do not order the appraisal until after the inspection period and subsequent negotiations have been agreed upon. It can take up to two weeks for an appraisal to be completed by the appraiser.
And, you want to close on or before 30 days from when you submitted your clients offer? Yes! It definitely can be done!
CONDO VS TOWNHOUSE/TOWNHOME
What is A Condominium?
A condo (short for condominium) is best defined as a structure that is divided into individual living units, with common areas throughout that are owned by all members of the association.
So, is a condo an apartment? Aesthetically, condos are similar to apartment buildings; the difference lies mainly in ownership. A condo is owned with shared walls and shared ownership. You own what is inside your condo. A Homeowner’s Association (generally made up of residents and a property management company) own what is outside.
What is a Townhouse (Townhome)?
A townhouse usually consists of multiple stories and will have its own entrance. A townhouse will often have a garage. The owner of the townhouse will also own the land beneath the townhouse. While there may be shared walls in townhomes either to the left or right they usually do not share ceilings. Townhouse owners are often responsible for the interior and exterior of their properties (like the roof)
Townhome owners may be part of a Homeowners Association. Each owner will pay dues to maintain shared amenities and common areas.
Why Does It Matter? Condo Versus Townhouse
If you need a mortgage the differences between a condo and a townhouse are significant. It a Condo or a Townhouse?
When it comes to financing a condo not only do you need to be eligible for a mortgage, the condo project has to be warrantable or approved also. FHA, USDA, VA, Fannie Mae and Freddie Mac will finance condos if the condo project meets specific requirements. The requirements are different for each type of loan however owner occupancy is a trend across all investors. If a certain percentage of units are investor-owned as opposed to owner-occupied, the condo project may not be warrantable and thus, not approved for a mortgage.
On the other hand, financing a townhouse is just like financing a site built house (and thus, the word house).
Seller contributions are the costs that a seller agrees to pay on behalf of the buyer at closing. It is a gift that a seller can offer a buyer to reduce the cost of buying a home. The money from the seller can then be put toward closing costs or pre-paid items (or both). Or, if something is discovered during the inspection period that needs to be remedied AND will not affect fair market the seller can agree to cover the cost of that repair. However, sometimes seller concessions in the form of “allowances” are a red flag to an appraiser and/or underwriter.
Seller contributions can benefit the buyer by lowering the amount of funds required for them to “bring to the closing table”. And, they can also benefit the seller by helping them sell their home faster. The amount of a seller contributions can range from 2 to 6% of the purchase price of the home (with the minimum required down payment) and is based on a number of factors including loan type and down payment amount.
- In a Veterans Administration (VA) loan the seller can pay up to 4% of the purchase price towards the borrowers closing cost and/or pre-paid items.
- In a Federal Housing Administration (FHA) loan the seller can pay up to 6% of the purchase price towards the borrowers closing cost and/or pre-paid items.
- In a Conventional (Fannie Mae or Freddie Mac) loan the seller can pay up to 3% of the purchase price towards the borrowers closing cost and/or pre-paid items.
- In a USDA Rural Development (RD) loan the seller can pay up to 6% of the purchase price towards the borrowers closing cost and/or pre-paid items.
CLOSING COSTS AND PRE-PAID ITEMS
Closing costs are expenses over and above the purchase price of a home that buyers and sellers typically incur in a real estate transaction. The term “closing costs” includes a variety of expenses such as attorney fees and lender fees.
Prepaid items will fund “escrow” for property taxes and insurance. One full year of homeowner’s insurance is collected and prepaid to your insurance company at closing and an additional cushion for insurance is collected and placed into an escrow account. In addition, prorated property taxes are paid at closing and also escrowed. An escrow account allows the lender to build reserves so they have the monies to pay homeowners insurance and property taxes on behalf of the home owner when they come due.
Mortgage interest (also known as per diem interest or odd days interest) is collected as a prepaid item. It is the interest that accrues between the closing date and month-end. Mortgage interest is collected as a prepaid item so the lender can apply it to your first mortgage payment. This way, no matter which day of the month you close, the lender has at least 30 days to enter your data into its system, and issue your first statement.
The amount of interest required varies depending on what time of the month you close your loan. Some homeowners close at the end of the month so that it reduces the interest accrued in advance of your first monthly mortgage payment.
NOT TO EXCEED- WHAT DRIVES INTEREST RATES
Mortgage interest rates are tied to the basic rule of supply and demand. Factors such as inflation, economic growth, the Fed’s monetary policy and the state of the bond and housing markets all come into play, in addition to your history of fiscal responsibility.
Mortgage interest rates have an impact on the overall long-term cost of purchasing a home through financing. Mortgage borrowers seek the lowest possible rates; the lowest mortgage interest rates are available to borrowers with the most solid finances and sterling credit histories.
ADDITIONAL TERMS AND CONDITIONS
Every property is in a flood zone. It is the flood hazard area designation that drives whether or not flood insurance will be required to get a mortgage. If your property is in Flood Zone X flood insurance will not be required.
Flood hazard areas identified on the Flood Insurance Rate Map are identified as a Special Flood Hazard Area (SFHA). SFHA are defined as the area that will be inundated by the flood event having a 1-percent chance of being equaled or exceeded in any given year. The 1-percent annual chance flood is also referred to as the base flood or 100-year flood. SFHAs are labeled as Zone A, Zone AO, Zone AH, Zones A1-A30, Zone AE, Zone A99, Zone AR, Zone AR/AE, Zone AR/AO, Zone AR/A1-A30, Zone AR/A, Zone V, Zone VE, and Zones V1-V30. Moderate flood hazard areas, labeled Zone B or Zone X (shaded) are also shown on the FIRM, and are the areas between the limits of the base flood and the 0.2-percent-annual-chance (or 500-year) flood. The areas of minimal flood hazard, which are the areas outside the SFHA and higher than the elevation of the 0.2-percent-annual-chance flood, are labeled Zone C or Zone X (unshaded).
TAXES or BUT ZILLOW SAID…
Property taxes are based on the purchase price of a home (or loan amount on a refinance). They are calculated based on millage (the amount per $1,000 of property value that is used to calculate local property taxes). Property taxes vary from state to state and parish/county to parish/county. One thing, however, is consistent- the buyer will probably not pay the same amount for property taxes that the seller pays.
The taxes on a certain property in Calcasieu Parish, Louisiana are currently $303.88 per year (with Homestead Exemption applied). If the home owner were to sell the property based on fair market value, the buyer’s taxes would be $3122.70 per year (with Homestead Exemption applied). There is a significant difference.
Kara Davis of Crew Lending can help you with all of your residential lending needs. She is a leading provider of mortgages in Lake Charles, Sulphur, Westlake and the entirety of Louisiana. She can also lend in 47 other states. Remember that customer service is key in the mortgage lending process. Kara Davis will help you understand the loan process. For more information call Kara Davis at 337-842-0115.