Meet your new Mortgage
When it comes to funding one of the biggest purchases you'll ever make, buyers are discovering that there's more than one way to get the job done.
Charlie and Julie Parks had ambitious goals for their starter home - they hoped to find one suitable for Julie's plan to start a grooming business out of the house. Ideally, they figured someday they could build a larger, barn-style house/grooming salon in the country.
But "someday" came on its own, sooner than later when Charlie spotted an old veterinarian's building for sale. The couple found that the vet office, with a boarding and grooming facility, was attached to a building that housed an immaculate 2,400-square-foot apartment.
Plus, the property was in Charlie's hometown of Bellevue, an area relatively convenient for the couple since he worked in Berea and she worked at a PetsMart in Elyria.
Charlie, 29, and Julie, 26, were sold on the historic property and the impressive stats: The buildings contained around 9,000 square feet of space, including a large garage and an underground, 13-horse stable that used to house the fire department's team of horses at the turn of the century.
"It was better than we hoped to find," he says. "It suited us perfect. It suited our living needs and Julie was able to start her own business."
But before Charlie and Julie could make Parks Pooch Parlor a reality, they had to secure financing. Clearly, a standard residential loan was not going to get the job done for a situation this complicated.
"Here we have an amazing structure and a couple who wants to buy for the first time," says the Parks' Realtor, Carol Woodard, a sales agent with RE/MAX Crossroads Properties in Westlake. "It's almost impossible for first-time buyers to even get into anything like this, but it is perfect because they can live there, they can run their business out of there and they also have storefront and storage space as well as a boarding kennel. It was a perfect opportunity. But financing was extremely tricky."
The couple tried to buy it as a residential property with longer terms, but the only way the loan would be approved was as a business loan with shorter terms. After some hard work and creative financing, the couple bought the buildings in June 2004 with a 20-year business loan.
Forget the one-size-fits-all, 20-percent-down scenario. These days, there are more ways than ever to make the home-buying process suit your own specific financial and long-term needs.
"It is just like tailoring a suit or a dress - what would be good for somebody is completely different for someone else," says Mike Fanous, an associate broker at Coldwell Banker Hunter Realty in Broadview Heights.
Want to get creative when it comes to meeting your own mortgage? Here are some ideas to get you started.
Say Goodbye to PMI
Private mortgage insurance - the monthly insurance fee tacked onto your loan amount until you have more than 20 percent equity in your home - doesn't have to be a part of your monthly bill.
"You can do split mortgages (take out a first and a second simultaneously) and not have to pay that private mortgage insurance," says Cullen Barney, mortgage loan officer at First Place Bank in North Olmsted. "Those are very, very common."
If you're not planning on putting any money down at closing, you'll take out two loans - the first for 80 percent of the home value, and a second mortgage for the remaining 20 percent. If you are able to make a down payment, you can decrease the amount of your second mortgage, i.e. an 80-15 scenario with a 5-percent down payment.
"A second mortgage typically is going to be a little bit higher interest rate than a first mortgage," Barney says. "But you're not paying private mortgage insurance, which is not tax deductible. The interest paid on the mortgage loan is [tax deductible], and you are still making a lower payment."
Put Someone Else's Money Down
If you're like many first-time buyers, you lack a large down payment. Depending on your income or where you choose to buy, you may be able to take advantage of federal and state grant monies and community block grants that are designed to help people buy homes.
"You might find one of the cities that has a program to help with the down payment," Fanous says. "Some cities have programs that pay as much as $10,000 to help with the down payment."
Make sure to ask about any down payment assistance programs at your bank and call the city where you hope to locate. Ask sooner than later: Most programs are given a certain amount of funds each year, and once they are given out, they're gone.
Multiply and be Fruitful
"We have a lot of multifamily [properties] on the market. Years ago we had a lot of young professionals who thought the best way to get into the home market was to buy a multifamily that would be owner-occupied, and have the tenant help with the debt service," says Helen Hertz, an agent with RE/MAX Homesource. "It's a way to kind of get their feet wet ... and keep that property as part of their investment."
That is, she notes, if you think you can be a landlord.
"It's not like owning a house. There are rules and expectations and there are responsibilities. Your tenant is going to call you if their toilet gets plugged or if their furnace stops working and you have got to be prepared for that," says Hertz, who owns multi-family properties herself. "As long as you have the temperament and the time, I think it's an excellent way to go."
A Little More Goes a Long Way
Some savvy homebuyers split their payment plan into biweekly, rather than monthly, billing cycles.
"You can save thousands of dollars of interest by making biweekly mortgage payments rather than monthly mortgage payments," Fanous says, "and you are paying the same amount, essentially."
By paying mid-month, you're applying some of the payment to the principal; the practice can literally shave years off your mortgage in the long term. Some mortgage lenders don't offer biweekly plans, and others charge a fee to switch over, so be aware of possible hidden fees if you're looking into joining a biweekly plan.
You don't have to join a program to get the benefits of a biweekly plan, however. Utilizing that system basically means that you're making one extra monthly payment per year, and you can do that on your own - some homeowners simply make an extra payment with the money they receive from their yearly tax refunds.
Team up on Closing Costs
There's no better way to lessen the financial load than to find a seller willing to share their wealth with you. When a seller wants out of their house, they're often flexible on the subject of closing costs.
"You might be able to negotiate with the seller to pay closing costs or some of the out-of-pocket money that you are required to pay to the financial institutions," Fanous says. "It just depends on a lot of variables - how well the house is priced and how well you can negotiate." For instance, if you are willing to make a full-price offer on the property, the seller has more incentive to help absorb some of the up-front fees necessary to close the deal.
Patricia Persiano, president of Professional Partners GMAC in Mayfield Village, notes that there are some great programs to help buyers and sellers meet in the middle. Down-payment assistance programs such as AmeriDream and Liberty Gold, she says, are good options for buyers who have the ability to make payments, but don't have the funding for a down payment and closing costs.
"I had two very good first-time buyers that used [Liberty Gold] and it worked out very well. But you've got to have a house that you know will appraise," she says. "Most sellers will take less to sell the house. Most sellers do not expect to get full price unless you have got a really special house in the middle of La-La Land. In today's market and for the last 15 years, every home has a range of value. There isn't one value for every home - even appraising is not an exact science."
Generally, these assistance programs facilitate a situation in which the seller agrees to forego from 3 to 6 percent of the selling price - depending on what the buyers need for a down payment and closing costs - so that the new homeowners can get into the house with virtually no money down.
In these cases, a buyer has to be willing to pay full price or close to it for the property, which would essentially make up the difference that the seller is paying the buyer off the top.
Secure a Pledge
This little-known route got Will and Rachelle Roetzel of North Ridgeville into their first home in 2001.
"We were looking for a house with a decent-sized yard and we stumbled upon this," Bill Roetzel says of the seven-acre property. The ailing house was built in 1825 and needed a considerable amount of work, including switching from a septic system and tying into a sewer line.
The Roetzels - both 33 with a 15-year-old son - knew this was the house for them, even though their Realtor advised against it.
"I said, 'You can't buy this house, it's horrible,' " their Realtor, Carol Woodard of RE/MAX Crossroad, remembers. "The septic tank has backed up so many times - there isn't enough bleach for this house," she told them.
At first, the property and home appraised for the purchase price. However, once the underwriter realized the land held the bulk of the value, the Roetzels were told that unless the home was brought up to value, the sale would not go through.
"The value needed to be raised about $60,000, and there is no one on earth that can bestow $60,000 on Willy and Rachelle," Woodard says. "However, the lady that owns the house lived in it forever and owned it free and clear. So he wants this house, I am going to figure out how to get him this house."
Woodard negotiated a pledge from the seller.
"If 20 percent of the agents now in business know what a pledge is I would be surprised," she says. "You take the difference, whatever the bank wants, and you put it in a savings account in the bank that is making the mortgage and hold it until the buyer can restore the house to the value that it has to be. Then the bank will reappraise it and will release the money to the seller. In the meantime, that money will be earning interest in the bank. You aren't free to take it out until the house appraises for the value that the bank wants. [The seller] agreed to put the pledge down so Willy could get his house."
The couple quickly brought the house within code. "I was told by a couple people It's not even worth it,' " says Bill, who spent a month working at the house after his day job to get the house ready for his family to move in. "We never thought we could find land so close to the city at the price we paid. For the price of my rent payment, I am in a house with seven acres."
12:00 AM EST
February 27, 2006