Jumbo Mortgage Loan : October 2009

I have had real estate owners in San Mateo County ask me - what is a private money loan? A private money loan is a real estate loan funded by non-institutional sources.

Non-institutional sources of private money loans vary. The source could be an individual. Often it is a group of people who have pooled some funds together. 

There are companies that specialize in the placing and funding of private money loans. These companies serve at least two important functions.

The first function they serve is the marketing of the availability of private money loans. They often post ads on Craigslist, trade publications, and other marketing vehicles to let both the public and mortgage brokers know that they have funds to lend.

The second function they serve for the private money source is similar to a funnel. They receive loan scenarios and toss out the ones they know that the private money source will not be interested in. They package the files that fits the source's interests, present the file, and receive approval.

Why would someone become a private money lender? Generally speaking, a private money lender gets a generous percentage return that is secured by real estate. To the lending source, it is an investment of their money. It is an investment alternative, just like investing in the stock market is an investment alternative. 

Why would someone borrow private money funds? Well, that will be the subject of my next post that will tell the top ten reasons why someone would want or need a private money loan.

The terms of a private money loan are usually much different than the terms that banks offer. One major difference is the length of the term. Generally, private money loans are no longer than five years.

Another difference is the interest rate. Private money rates tend to be higher than the rates banks offer. Higher rates make sense because these loans are usually riskier.

The fees associated with a private money loan are usually higher than bank loans. It's not unusual to pay anywhere from three points to eight points to obtain a private money loan.

With the tightening of underwriting guidelines by banks, private money loans, I predict, will gain market share in the near future. 

If you need help with a private money loan in San Mateo county, or anywhere in California, you can contact me and I will try to help you.

Jumbo Loan Blog

Get Your Mortgage Phil

Richard Weisser wrote this interesting article about a new idea on how to fix the real estate market. I wrote an article in November, 2007, that had similar ideas.

I don't necessarily agree with incentive tax policy, but I do think making the down payment tax deductible serves two purposes. First, it will result in larger down payments. Larger down payments means lower payments and more equity, which will reduce foreclosures.

Second, a down payment tax deduction will stimulate sales. More sales means more money circulation throughout the economy.

What effect do you think this proposal would have on San Mateo County real estate?

Many homeowners and home buyers in California have probably heard of a bridge loan but do not know what it is or who should obtain one.

A bridge loan is usually a short-term loan (usually written for three months to three years) that provides funds to buy real estate from a piece of real property that an owner has an intention of selling, but will not close before escrow closes on the new property. 

This transaction is called a bridge loan because these funds "bridge the gap" between the closing of two transactions. 

Let's look at an example of a bridge loan. Bill and Betty Buyer would like to purchase their California dream home for $800,000. The down payment required is 20%. They have enough money saved for the closing costs and cash reserves, but little else saved.

Their current home is worth $500,000. The existing balance on their mortgage is $50,000. They have $450,000 in equity.

Bill and Betty would like to make an offer on the new home non-contingent on the sale of their current home. How, they wonder, can they make this offer?

Enter Bob the Bridge Loan Guy. He tells Bob and Betty that he can help them obtain a $210,000 loan on their current home ($160,000 for the down payment plus $50,000 to pay off their current mortgage). Bob the Bridge Loan Guy has figured out that the Buyers can qualify for both the bridge loan and the purchase loan because their debts on both the current home with the bridge loan and the new purchase loan are less than the maximum amount of debts to qualify.

The Buyers successfully make their offer and close escrow 30 days later. Another 30 days later they close escrow on the home they listed for $500,000. They use $210,000 from the proceeds of the sale to pay off the bridge loan, and use the other $290,000 in proceeds to pay down the new mortgage.

A few important tips you should know if you are considering a bridge loan:

• You must be able to qualify for the bridge loan and the loan to purchase the new home.
• There is no guarantee that your current home will sell quickly. How long can you afford to pay mortgages on two homes?
• A bridge loan is usually more expensive than other types of loans. Consider other types of financing (do you have an equity line of credit available, for example?)
• A bridge loan may be available with stated income under the new Reg Z guidelines as of October 1, 2009.

Stated income loans are still available in Lake Tahoe. As of October 1, the rules have been changed regarding stated income loans. However, Lake Tahoe has many homes that are either second homes or rental properties. Second homes and rental properties are exempt from the new laws regarding stated income loans.

If you own or want to buy a second home or rental property in the Lake Tahoe area, there are stated income loans available for:

• up to $10 million
• unlimited cash-out
• flexible credit scores 
• up to 75 percent of the property value
• bridge financing

I have found that many people that many people do not understand how mortgage rates get locked here in Burlingame, California, and in many other areas.

As a mortgage broker, I receive mortgage rates from our lending partners every day (sometimes more than once, but that is a story for another post). Each lender has the mortgage rates for each of their programs (30 year fixed, 15 year fixed, etc.) published on a ratesheet. 

Most people realize that there are many mortgage rates for each loan program. What they do not realize is that the points charged for the mortgage rates offered vary by the rate lock period.

Many lenders base the points charged in 15 day increments. Let's look at an example of mortgage rates for a 30 year fixed rate (these rates are for illustration purposes only, not truly a reflection of current mortgage rates).

Rate        15 Day     30 Day     45 Day     60 Day

8.00%        1.00      1.25          1.50        1.75

In this example, the 8% mortgage rate would cost a borrower 1 point for a 15 day lock, 1.25 points for a 30 day lock, 1.50 points for a 45 day lock, and 1.75 points for a 60 day lock.

This example raises two questions about mortgage rates for a homeowner or homebuyer: first, why would I lock for any longer than 15 days since the 15 day lock is cheaper than any of the other lock periods? Second, what needs to happen in order to get the 15 day rate lock?

Let's answer the first question - there are two reasons why mortgage rates should be locked in longer than 15 days. The first reason is because mortgage transactions typically take longer than 15 days. Refinances are harder to close faster than purchases because of the requirement that the borrower has three business days after signing the final loan documents to rescind the transaction. Purchases do not have this requirement. 

The second reason why mortgage rates should be locked in longer than 15 days is because it is protection for the homeowner or home buyer in a rising interest rate environment. Most of my clients are happy to pay a little bit more by locking in for 30 days or 45 days to guarantee they will get the mortgage rates they have been offered, provided their application is approved.

Let's answer the second question - what needs to happen to get a 15 day rate lock? The answer to this question is to work as a team with your mortgage broker.

Mortgage rates are volatile - we often have our lenders update their mortgage rates two or three times per day. Your mortgage broker should use a rate alert service in order to stay on top of the daily activity in the mortgage market. If there is a rate change he should be alerting you about the change. 

The mortgage applicant needs to do his part also in order to get the 15 day rate lock. Documentation needs to be completed in full. Most of our lending partners will not lock mortgage rates until the loan application has been approved, and all conditions for closing have been signed off by the underwriter. As you can see, speed, cooperation and teamwork is required by the applicant and mortgage broker.

Here is a strategy I advocate to get the 15 day rate lock in a declining rate environment. Let your mortgage broker know what mortgage rate and point structure you would like to target. When the mortgage rates are within .25% of your target, get your documentation submitted to your mortgage broker and try to get it approved ASAP. With an approval you can just wait until the rate targeted hits. Again, this takes great cooperation and communication

with the client and the mortgage broker. I have used this strategy with my clients here in Burlingame, California, with excellent success. 

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Here is an interesting post from Brian Brady about why the first-time homebuyer tax credit should be abolished. I agree with Brian Brady. The first-time homebuyer tax credit may be helping real estate agents, mortgage brokers, and home buyers in the short-term, but long-term it will not help us here in California. We need less government intervention in the real estate and mortgage market to create true value and wealth.