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Education

Capital

  • Every loan program has a down payment requirement. Even though some may be zero.
     

  • All loans have closing costs and some have escrow requirements.
     

  • Many loan programs also require some cash reserves to be met.
     

  • In residential lending there are very specific guidelines regarding where your assets may come from, whether or not they must be seasoned, and how accessible they are. When you apply for a mortgage,
     

  • The lender will ask for up to two months of bank statements, which means, you better understand today, exactly what the requirements are so you don’t trigger a red flag or worse, cause your loan to be denied.
     

  • Check with your loan originator before you move money around.
     

  • Funds can come from your bank accounts, retirement accounts, stocks and bonds, a gift from a relative or friend, depending on the loan program. You can borrow the money from another property, from a car or truck or you can borrow against a stock account.
     

  • Borrowed secured funds are okay.
     

  • UNSECURED borrowed funds are not okay, like from a credit card or personal loan.

Capacity

  • Capacity is your ability to repay the loan.
     

  • The simplest income to calculate is the borrower with a regular job who is paid a salary or receives an hourly  wage.
     

  • As long as you work 40 hours a week or more, you’ll only need to provide a pay stub and one or two years of w-2s.
     

  • For almost all other types of income, you need to understand a couple of basic principles. One, a lender needs to see that you have received that type of income for two consecutive years and two, you are likely to receive that income for the next three years.
     

  • The lender will ALWAYS need to see one, two or three years of tax returns from you AND your business, if it’s reported on a separate return.
     

  • The calculations for this income can be very complex and truly require a higher level of expertise to provide the best outcome for YOU. This is an area where Victory Funding really shines
     

  • Understanding how to prove your income to a lender is an important step in obtaining the financing you need to purchase the Real Estate you want.

Credit

Credit score consists of five components:
 

  • 35%: On-time payment history

  • 30%: Ratio of available credit to used credit (keep below 50%, ideally below 25%)

  • 15% Length of credit history (avoid closing old cards)

  • 10%: New credit (multiple inquiries in a short period for the same purpose are okay)

  • 10%: Types of credit used (mix of installment and revolving credit

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To establish credit history:
 

  • Start with at least one card over $5,000

  • If unable to get major credit, start with secured credit cards

  • Open a bank account and do an installment loan (e.g., personal loan or car loan)

  • Become an authorized user on credit cards (careful, not always useful for lenders)

  • Pay rent by check or money order to establish an on-time payment history

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Tips for maintaining good credit:
 

  • Make all payments on time

  • Keep credit utilization low

  • Maintain a good mix of credit types

  • Avoid opening multiple new credit accounts rapidly

Collateral

  • What makes real estate financing one of the least expensive types of borrowing with some of the lowest interest rates is that your promise to pay is backed by collateral.
     

  • You are pledging an asset to secure the loan and if you don’t make good on your promise to pay, the lender can seize your property and re-sell it to fulfill the obligation.
     

  • Lenders verify the value of the property, the condition of the property and even the real estate market conditions in neighborhood your property is located in order to make their 
    final lending decision.

     

Three approaches to determine the value of your property:
 

  1. The market approach

    1. The value is determined by similar properties in close proximity that have recently sold.​

    2. Used most for residential lending and most small commercial multi-family lending.

  2. The income approach

    1. The value is determined by the income produced by the property.​

    2. Used for large commercial properties where their use is uncommon and leases are longer term.

  3. The cost approach

    1. The value is determined by the cost to build the property 

    2. Used for new construction residential along with the market approach ​

    3. Used to develop the value of larger commercial construction financing where properties aren't prevalent in the market. 


Appraisals can be very subjective, but there are guidelines that exist to help guide the process and, in most cases, come up with values that protect both the borrower and the lender. This is part of YOUR due diligence AND the lenders.

Seller Concessions /
Seller Contributions:

  • Seller concession allows borrowers to borrow a portion of closing costs.
     

  • Can be used for prepaids and closing costs, not for down payment.
     

  • Example: Buying a $200,000 house with $15,000 in down payment and closing costs, and a $7,000 seller concession means bringing $8,000 to closing instead of $15,000.
     

  • Disadvantages: Increases the appraisal amount required, potentially putting the seller at a disadvantage. Lenders must use the appraised value OR the purchase price, whichever is LOWER.
     

  • Use whole numbers for concessions (e.g., $7,000, $6,000, $10,000) instead of percentages.
     

  • Some loan programs allow up to a 6% seller concession (FHA, USDA), while others allow only 3% (conventional loans). For Fannie and Freddie investment property loans, a 2% concession is allowed.
     

  • For VA loans, the concession needs to be called a "seller contribution" on the contract and is unlimited. VA loans also allow for a 4% concession for pre-paid costs.

Assets

  • Assets are necessary for closing and reserves in many cases; verification is required.
     

  • Post-9/11, Patriot Act requires tracking of large deposits and suspicious activity.
     

  • Legal sources of assets include bank accounts with 30-60 days of seasoning, employer
     

  • bonuses, tax refunds, sale of assets (with documentation), 401k or retirement funds,
    stocks/bonds/mutual funds (with tracking), gifts (FHA from close relatives, conventional
    from anyone), secured borrowed funds (not counted in debt ratio), joint bank accounts
    (with letter of access).
     

  • Sources that cannot be included are unsecured borrowed funds, assets used for income,
    and wedding gifts of cash. Any untraceable sources are not be allowed.

Closing Costs

  • Fixed Closing costs: Include any cost of obtaining the mortgage that is paid out to a settlement service provider required to close the loan and are non-refundable fees.
     

  • Closing costs can include deed and mortgage filing fees, NY State mortgage tax. title insurance, attorney fees, credit report fees, flood certification fees, upfront mortgage insurance premium for FHA loans, funding fees for VA and USDA loans.
     

  • Prepaids: Include any funds required by a lender to be collected at closing, but are paid out on the borrower’s behalf. Pre-paid expenses can include escrow of taxes, insurance, pre-paid interest, tax reimbursements prorated and refunded to a seller.
     

  • These fees are refundable if the transaction doesn't close.
     

  • Variable costs: Some lenders may charge application, processing, underwriting, or doc prep fees, also known as junk fees, which are like points and directly benefit the lender.
     

  • Origination costs: Fee paid to the lender to originate the loan, can be paid by the lender or borrower. Junk fees are considered origination costs, so be careful to pay attention when you are shopping for a mortgage.
     

  • Discount points: Used to buy down the interest rate, can be beneficial in certain market conditions. Remember, this is a math problem, not an emotional problem.
     

  • Victory Funding doesn't charge junk fees and offers options for discount points.

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