A soft second loan, sometimes called a silent second, is subordinate to the first mortgage, whose payment is deferred or forgiven until a specific date or the resale of the property.  This would mean that buyers would not have to contend with regular payments thereby keeping their debt-to-income ratio lower and more affordable.

While normal lending institutions may not be open to such types of financing, family and friends may be.  In some cases, these relatives and friends may be inclined to make a gift to help buyers get into a home.  Instead of an outright gift, if the person makes the loan, they have options to be repaid at some point in the future or in other cases, they could forgive the debt but don’t have to make that decision today.

There are more than 2,000 down payment assistance programs nationwide.  State, county, and city governments run many of them.  Other programs could be from churches, employers, non-profit organizations, regional Federal Home Loan Banks, federally recognized Native American tribes and their sovereign instrumentalities or public agencies.

Various local or state Housing Finance Agencies have used “soft second” mortgages for down payment and closing costs to eligible borrowers.  For example, the Indiana Housing and Community Development Authority offers down payment assistance in the amount of 3 to 4 percent of the purchase price of the home at zero percent interest with no monthly payments. The loan is fully forgiven after two years if the borrower remains in the home.

In a more mainstream application, let’s say that a parent or other relative was willing to help a buyer with their down payment and possibly, closing costs to purchase a home now.  However, they will need the money for their retirement at some determinable point in the future, possibly, five to ten years.

The sales contract would disclose a “soft second” together with the terms which could include interest and due date such as ten years from execution of note or when they sell or refinance the property whichever comes first.   It would also specify that no payments would be made until the maturity.

The mortgagor of the “soft second” may also retain the right to forgive the loan.

The lender of the first mortgage must be aware of the intended soft second and it should be mentioned in the sales contract so it can be underwritten by the lender appropriately.  Failure to disclose a soft second to the lender is illegal and borrowers who fail to do so could be prosecuted.  Mortgage fraud is classified as a Class C felony under federal law.

Both liens would be recorded for public record for the safety of all parties concerned.

Since this procedure is not commonplace, the advice is to run this concept past your lender prior to writing the offer.  With full disclosure in the contract and the proper terms to satisfy underwriting, you should be able to structure a transaction to get a qualified buyer without a down payment into a home.

Some things to consider in the second mortgage note is a firm due date far enough down the road that it isn’t going to trigger risk issues.  An example would be ten years or when the property is sold or refinanced, whichever comes first.  Specify an interest rate and arbitrary payments which would give the buyer the option to make payments if they wanted.  By doing this, the underwriter can calculate payments and amount owed at the term.

In today’s economy, there are a lot of companies that have rich cash reserves, as well as plenty of individuals also.  Once buyers have identified a friend or relative to become the lender on the second mortgage, your agent will help you find a lender for the first mortgage who is willing to participate.

The buyer will become pre-approved and the process of finding the home can begin but not until the other steps have been finished.

Waiting for the mortgage rates to come down before you buy a home may not be a good decision.

If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be devoured by the appreciated price increase.

As of 10/27/22, the 30-year fixed-rate was at 7.08% which is the highest level since April 2002.  If the rate drops to 5% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.

An increasingly popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.96% rate for five years.  Then, refinance to a fixed-rate when rates come down.

Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.

Mortgage rates have increased over 3% in the first three quarters of this year.  Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates are substantial and could lower the monthly payment.

The lower adjustable-rate would save a buyer $323.90 a month during the first period of five years.  At any point during that period, they could refinance at better interest rate should it become available.  However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.

Mortgage rates have been low since the housing crisis that caused the Great Recession.  The government kept them low to build the economy.  Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster the economy which led to inflation which is what is causing the rates to increase currently.

When inflation is under control and back to acceptable levels, the rates should lower.

Home prices are a different situation.  The recent rise in mortgage rates has cause home prices to moderate because it affects affordability.  Inventories are still low and there a pent-up demand for housing from purchasers unable to buy during the pandemic.

This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise.  The rate of appreciation could even increase when rates come down which would also increase affordability and demand.

Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.  Reach out to us and we can discuss the options that are available.

Social Security was established, on August 14, 1935, to take care of the country’s elderly in their retirement years.  Today, about 65 million or 1/6 of Americans collect benefits and the average monthly retirement amount received in January 2022 was $1,614 per month or about $19,370 per year.

This annual Social Security benefits exceed the 2022 Federal poverty level of $13,590 for individuals and $18, 310 for a family of two but from a practical level, it is nowhere near enough to be comfortable in your “Golden Years.”

Every adult in the work force, can go to SSA.gov to find out what to expect to receive based on their planned retirement age.  Since it probably won’t be the amount you need to retire comfortably, at least you’ll know how short you’ll be so that you can devise an investment plan.

There’s a quick formula to estimate the investable assets needed by retirement to generate a certain income.  The target annual income is divided by a safe, conservative yield to determine the investable assets needed.

A person wanting $100,000 annual income generated from a 5% investment would need investable assets of $2,000,000.  If a person had $500,000 now, they would need to accumulate $1.5 million more by the time they retire.  A 50 year old wanting to retire at 65 would need to save about $100,000 a year for 15 years.

If trying to save an extra $100,000 a year seems impossible, consider the leveraged growth available in rental real estate.  The use of borrowed funds can contribute to the yield earned by the investment.  By reinvesting the positive cash flows from the rental to retire the mortgage, the home could be paid for by retirement, providing more cash flow when it is needed the most.

One of the bright spots in investments is rental real estate which is also open to self-directed retirement savings.  Single-family homes offer high loan-to-value mortgages at fixed interest for long terms on appreciating assets with tax advantages and reasonable control.  Price appreciation alone has outpaced inflation for the last fifty years.

Many Americans have participated in Individual Retirement Accounts, SEPs, 401(k)s or other types of retirement that would supplement the Social Security benefits.  Many of these are invested in mutual funds which have lost about 20% in value in 2022.  With inflation at a 40-year high, many retirees and future retirees are concerned about their income from these investments.

Retirees want a safe and secure investment whose income will not be eroded by inflation.  Single-family homes, in predominantly owner-occupied neighborhoods, meets those requirements.  Home prices have experienced double-digit appreciation in the past two years and around 5% for the last five decades.

Increased mortgage rates coupled with rising home prices have sidelined many would-be purchasers who want to be in a home.  Since they cannot buy at this time, the next best alternative is to rent a home.  This has added to the increased demand for single-family homes in good neighborhoods which have resulted in increased rents.  While this isn’t good news for tenants, it is for investors.

Investing in rental real estate could be a way for you to increase your retirement income and grow your net worth while avoiding the volatility of the stock market.  Current homeowners already are aware of the value of homes as well as the maintenance they require.

To get more information about single-family homes for rentals, download our Rental Income Properties guide.  You can also schedule a time with me to get answers for any questions you may have and find out about what is available now.

There are a lot of professionals involved in the homebuying process.  And when these people can function as a team, the buyer is much more likely to end up where they want to be…in their new home.

The lender is an integral part of the team unless you are going to be paying cash.  Trust is very important when selecting this person because they are going to qualify you for the mortgage you need.  The interest rate and fees should be fair based on your credit, income, and the market.

You’ll want someone who can close at the rate and terms that were quoted.  In a rising market, you may want to consider locking in the rate so that it doesn’t go up before you close.

The appraiser is hired indirectly by the lender to determine the value of the home as part of the loan approval process.  During the financial crisis of 2008, a process was created by the Dodd-Frank Wall Street Reform and the Consumer Protection Act to limit direct contact between borrowers, lenders, and appraisers.

This requirement protects appraisers from being influenced by a lender.  Sometimes, an Appraisal Management Companies, AMC, may assign an appraiser who may not be familiar with a particular area or type of property.  The real estate agent can act as a liaison to provide additional information about the property and area that the appraiser would not necessarily know about initially.

Once a contract has been fully agreed upon, one of the first steps is for the buyer to have a home inspection made by a professional.  While most states require these professionals to be licensed, 14 states do not require one to perform inspections.

In addition to being licensed, some inspectors belong to professional organizations that provide specialized education and suggest levels of performance.  Recommendations from friends who have recently purchased a home would be helpful.  Your agent may give you several names of inspectors and you can ask for the buyer’s contact information who used them recently to verify their results.

Pest control is not usually included in the normal home inspection.  These are also licensed specialists who are concerned about termites, other insects, and vermin.  If you do not have experience with a pest control company, recommendations from friends and your agent can give you a place to start.

Property casualty insurance is required by the mortgage holder but even if you were paying cash for a home, it would be prudent to have insurance.  A homeowners’ policy provides the broadest coverage with fire and other named perils including burglary for both the dwelling and the contents. Liability is packaged with the other coverage to protect you if someone is hurt while on your property.

Deciding based on policy price may not present a complete comparison.  Another consideration is how the company handles claims in both time and settlement.

The title insurance provider is usually named in the sales contract.  There are two different policies that are usually offered simultaneously but paid for separately.  The owner’s title policy guarantees the buyer they are getting a clear and marketable title while the mortgagee’s title policy guarantees the lender that they have an enforceable lien.

The Real Estate Settlement Procedures Act gives the buyer the right to determine the provider.

Surveys are commonly required when new mortgages are established to make sure there are not encroachments on the property lines.  Even in a cash purchase, a buyer may want to get a survey for the same reason.  In some cases, lenders might accept a seller’s previously obtained survey.

The title company usually order’s the survey based on instructions from the contract or lender.

A real estate attorney is required in some states to be involved in all transactions.  In other situations, a real estate attorney may be involved to draw the legal documents but in no way is representing the interests of a specific person.

A buyer or seller can consult an attorney and have them represent their interests in the transaction.  Once a buyer understands if an attorney is not required in a real estate transaction, they are free to decide if they want legal representation.

The listing agent is hired by the seller when they place their home on the market for sale.  In many cases, the listing agent has a fiduciary duty to put the seller’s interest above their own.  These duties include loyalty, confidentiality, disclosure, obedience, reasonable care and diligence and accounting.

The buyer’s agent will interface with the listing agent in the various negotiations that will take place beginning with showing the property, offer, acceptance, and all the other steps that will lead to the settlement of the sale.

Agency describes a legal relationship and can apply to seller’s and buyer’s agents and is created once an agreement is signed; a few states have provisions for oral agreements.  Members of the National Association of REALTORS® subscribe to a code of ethics that describes their practice and behavior to clients and the public.

There are many professionals involved in the purchase of a home.  From a buyers’ standpoint, it is helpful to have one person who is familiar with the process to be coordinating the efforts of the different parties to finish with a settlement and possession.

There are a lot of steps and even if a buyer has been through the process before, they may not have the experience to anticipate difficulties and solve issues that could derail the transaction.  The role of a third-party negotiator is a valuable role that the buyer’s agent plays.  While the buyer is in control, the buyer’s agent can provide information and background necessary for sound decisions.

The purchase of a home is the largest investment most people make.  Like it takes a village to raise a child, it helps to have a team to buy a home.  Finding an agent to keep your best interests at heart is the first team member you need to select.  From there, your agent can help you find the other team members.

For more information, download the Buyers Guide and make an appointment, in-person or virtually, to find out how they can put together your Homebuying Team.  In that appointment, ask the agent to explain agency and its benefits to you in your upcoming transaction.

Rising mortgage rates are causing some would-be buyers to pause their decisions until they determine whether rates are going to come back down.  While it may be possible, the probability is that prices are going to continue to increase.

On December 23, 2021, the 30-year fixed-rate, according to Freddie Mac, was 3.05% and is at 6.29% as of September 22, 2022, a 3.24% increase. On a $360,000 mortgage, the principal and interest payment went from $1,528 to $2,226.  The $698 difference represents a 46% increase in the payment.

It seems understandable to pause and see if rates will come down again, especially since they went up so fast, but it probably isn’t going to happen anytime soon based on the Fed’s position on controlling inflation.

The fact that inventories are growing slightly, and market times are increasing doesn’t negate that supply cannot keep up with demand and homes are continuing to appreciate, albeit, not as much as they did in 2021.

If a person waited a year to see if the rates come down but, in the meantime, the prices increased 10% and the rates stayed the same, the home in the example above, would have a $226 larger P&I payment.

As an alternative strategy, the buyer could purchase the home on a 5/1 adjustable-rate mortgage with a 4.64% rate for five-years.  Instead of $2,226 for the P&I payment for the fixed rate at 6.29%, the payment on the ARM would be $1,926, a $300 savings.

They would have purchased the home at today’s prices, avoiding appreciated prices and would have five years to refinance at a lower fixed rate should they come down.  Assuming the rate adjusted upward the maximum amount at each period, it would take over seven years to exhaust the savings on the lower payments for the first five years.

It is unfortunate that some buyers missed a window of opportunity to purchase last fall when mortgage rates were near an all-time low.  That window has closed, and it may not open again.  People who can still afford to buy, even though rates are significantly higher, are taking a risk waiting for rates to come down.  Even if they are correct, the prices will be higher, offsetting any possible savings.

If they are wrong, both prices and rates will be higher, and they may be priced out of the market.

In the 1980s, when mortgage rates topped 18%, the best real estate agents in the country presented alternative financing choices to buyers.  If your agent hasn’t had conversations with you about alternatives to fixed rate financing, there could be options available that you need to consider.

Depending on your price range and individual situation, investigate local and state financial assistance programs, ARM Comparison, 2/1 Buydown, and Cost of Waiting to Buy and download our Buyers Guide.