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- Mortgage Q & A
- Q. I am a real estate investor in search of loan programs designed to allow me to purchase property whereby I can set up "Lease Option" arrangements with the tenants. In time I would sell the property to the tenants and use the lease payments they have made towards the down payment on the purchase price. Do you have any suggestions? –
B.T. Atlanta
A. There are mortgage programs that allow some of the lease payments made to be credited towards the down payment and/or closing costs associated with the purchasing of the property. You will need proof that the renter has paid the rent payment in a timely manner for at least 6 to 12 months. Always have the renter pay by check. They may have to provide cancelled checks to prove that they have paid you as the owner and that the payments made were for the correct amount and paid on-time. You should also have your attorney draw up an “Option to Purchase” contract and have it recorded.
One of the drawbacks to crediting lease payments toward a down payment is that underwriting guidelines state that lease payments may be used towards the down payment and/or closing costs but only to the extent of the amount of the lease payment that exceeds “fair market rent” for the area. Usually that doesn’t leave much left over to be credited towards the down payment.
The simpler way is to agree, as the seller of the property, to pay some of the closing costs for the buyer or lower the sales price by an agreed upon amount equal to what the lease payments would have amounted to.
Q. I am planning to either sell my home or rent it out. I have only been in my home for five years and have already refinanced once for a lower rate. A friend suggested that I put my rent my home on Section 8 and take out a home equity loan to purchase my next home. Please explain to me the benefits of and pit falls that I may encounter. – T.D. Atlanta
A. I suggest you get pre-approved for the purchase of the new home prior to committing to renting your existing home.
When evaluating your pre-qualification for obtaining a home loan, the lender will qualify you with the existing mortgage payment, the second mortgage payment and the proposed payment for the new home. Most lenders have recently changed their guidelines pertaining to the counting of the proposed rental income home in order to offset your current mortgage payment. If you have no previous experience as a landlord, proposed rental income may not be considered as income when qualifying for the new home.
Q. My mortgage company is offering to set up my existing mortgage on a bi-weekly plan. That is where I make ½ of my normal monthly mortgage payment but I pay it every two weeks. They claim it will save me thousands of dollars. They have a set-up fee of $295.00 plus $4.95 transaction fee for each payment. Is this a “good deal”? – L.B. Winder
A. A bi-weekly loan allows for 26 half-payments per year, which equals 13 regular payments, or one extra payment a year. Making one extra payment on a 30 year loan essentially makes it a 25 year loan because you are paying extra money every year towards the balance. By making an extra payment annually a 15 year loan pays off in 13 ½ years.
So did you “save” thousands of dollars? Well, maybe. You certainly will have paid your lender less money. But what could you have done with those extra funds if you had not given them to your mortgage company? You could be paying off a credit card bill or investing the money in a retirement fund or any other number of investments.
I have never paid ahead or “pre-paid” any of my mortgages. Why would I want to pay off a low interest, tax deductible loan when I have other outstanding debts with a higher non tax-deductible interest loan? There are other investments that my money could be working for. Some investors are trying to pull money out or leverage their equity into other property or investments not pay the loan off early.
For some people close to retirement age where their income may become fixed or declining, it gives them a comfort level of owning their home “free and clear”. But would I pay my lender for the privilege of giving them more of my money early if I wanted to pay the mortgage off early? No, not when I could just send them an extra payment once a year without paying their “set-up” fee or “transaction” fees!
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