Fannie Mae plans to increase DTI limit

Thinking of buying a home this year? There’s good news on the horizon for prospective home buyers, as Fannie Mae announces plans to make it easier for some borrowers to get a mortgage.

Fannie Mae plans to raise its allowable debt-to-income ratio (DTI) from 45% to 50% on July 29, 2017. This will allow more borrowers whose DTIs were just slightly too high to potentially get approved for financing.

With Fannie’s DTI limit 5% higher, it’s likely that more millennials, first-time buyers, moderate- to low-income borrowers, or anyone carrying more debt, can get a conventional mortgage. This is great news for people who are dealing with student loan, credit card or other types of debt.

Fannie Mae made the decision to increase its DTI limit after analyzing years of data that examined the ability of borrowers to make their monthly payments. After the analysis, Fannie Mae found that they can “more accurately predict the risk of default among potential borrowers,” and that increasing the DTI ratio “will enable more qualified borrowers to get a mortgage loan,” said spokesman Pete Bakel in a statement.

It is important to note that, even with the increase in Fannie Mae’s guidelines, individual mortgage lenders may set their own DTI limitations in addition to the Fannie Mae standards. Therefore, a mortgage lender may still require a DTI of no more than 45%, even after Fannie Mae adjusts their maximum.

It is also worth noting that the increase in Fannie Mae’s DTI limit will not necessarily mean those with higher DTIs will be approved for financing. Prospective borrowers will still need to meet all the other guidelines for loan approval (LTV, FICO score, etc.).

Speak with your mortgage professional for details and ask them about their maximum DTI for conventional home financing.

What is DTI?

A person’s debt-to-income ratio (DTI) is a calculation of their monthly recurring debt (car payments, credit cards, student loans, etc.) divided by their recurring monthly income (before taxes). For example, if your monthly recurring debt totals $1,500 and your gross monthly income is $3,000, your DTI would be $1,500/$3,000, which is .5 or 50%.

Mortgage lenders use a potential borrower’s DTI to determine if the borrower can handle taking on additional debt in the form of a home loan.

Fannie Mae’s DTI limit is currently 45%; however, starting on July 29, the limit will increase to 50%.

Have more questions?

Feel free to reach out to the home loan experts at Mid America Mortgage to explore financing options and see which options may work for your scenario. We’ll be happy to answer any questions and provide you with a free, no-obligation mortgage rate quote.

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Home Builder Sentiment Drops in July

home builders

Builder sentiment in the market for newly-built single-family homes slipped two points this month to a level of 64 from a downwardly revised June reading on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Despite remaining well over the threshold of 50, where any reading above 50 indicates more builders feel good about the market, the latest reading is the lowest since November 2016.

The latest results from the HMI survey reflect growing concerns surrounding higher material costs and lack of buildable lots on the market.

“Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber,” said Granger MacDonald, NAHB chairman and home builder and developer from Kerrville, Texas. “This is hurting housing affordability even as consumer interest in the new-home market remains strong.”

Despite July’s reading hitting an eight-month low, industry leaders are insisting builder confidence remains solid for newly-built single-family homes.

“The HMI measure of current sales conditions has been at 70 or higher for eight consecutive straight months, indicating strong demand for new homes,” said Robert Dietz, NAHB chief economist. “However, builders will need to manage some increasing supply-side costs to keep home prices competitive.”

The NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Each component is scored and used to calculate a seasonally adjusted index where any number higher than 50 indicates that more builders view conditions as good than poor.

All three HMI components registered losses in July but are still within the positive territory, according to a July 18 NAHB press release.

The components gauging current sales conditions dropped two points to 70 while the index that measures sales expectations over the next six months dropped two points to 73. Meanwhile, the component measuring buyer traffic slipped one point to 48.

Regionally, the HMI score for the Northeast rose one point to 47, while scores for the West and Midwest each slipped one point lower to 75 and 66, respectively. The South experienced the greatest fall, dropping three points to 67.

What This Means for Home Buyers

Anyone who’s out there searching for their new home right now is probably already aware that demand is outpacing supply – at least in most markets. With fewer homes going up for sale and more people looking to buy, new construction was a shining hope for the real estate industry and for prospective buyers. However, as buildable lots become scare and the cost of materials rises, confidence from builders is beginning to wane. This could lead to good news and bad news.

First the bad news. When home builder confidence begins to drop, it’s not a good sign that there will continue to be new housing developments popping up across the country. While those who favor slower development might be sighing a breath of relief at this realization, other folks who are eager to buy their first home or move up to their next home are facing a dilemma: fewer homes on the market and fewer homes being built can drive prices higher. As affordability is threatened, the entire housing and real estate industry can be affected.

The good news, however, is that despite the drop in builder confidence, levels are indeed staying within solid ground. Remember, any HMI reading above 50 indicates more builders are feeling positive about the market. In order for the HMI to fall below this threshold, it would have to lose more than 14 points. Since the most recent dips were between 1-3 points, it’s unlikely that this will happen any time soon. So fear not, buyers. But do be cautious about timing. Once you find a home you love, don’t hesitate to make an offer. In fact, it would be wise to go ahead and get pre-approved for a mortgage now if you’re even remotely considering a home purchase this year. Remember, the competition can get fierce in a low-supply market. The more prepared for financing you can be, the better!

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Is refinancing a mortgage really like starting all over?

house money keys

Refinancing your mortgage can be a great way to reduce your monthly payment. However, refinancing is generally thought to set the homeowner back and “restart” the mortgage, so-to-speak. This can be less than ideal for borrowers who want to own their homes outright. But does refinancing always mean starting again from square one? Not exactly.

Mortgages are paid off over time through a structure known as amortization. Amortization typically favors the lender, allocating a larger portion of each payment toward the interest first, then gradually applying more and more of the payment toward principal. This is why the majority of your mortgage payment goes toward paying back the loan interest during the early years of homeownership.

As time goes by and you progress in your amortization schedule, the percentage of your mortgage payment that goes toward the principal balance will increase. With a 30 year mortgage however, most borrowers barely make a dent in their principal balance until well after 10 years of steady payments. Therefore, homeowners with 30 year mortgages may be less inclined to refinance if they think they will be winding the clock back to the very beginning.

Fortunately, there is a way to refinance without actually resetting your mortgage 30 years. As a homeowner, there is no rule that says you must refinance into a 30 year fixed rate mortgage (unless you refinance into certain loans where 30 year fixed rate is the only term available, such as USDA loans). Therefore, if you decide to refinance, you can choose a 20 or 15 year loan instead. Some lenders may even offer other term options like 25 or 10 year loans, though 15, 20 and 30 are the most common choices.

At today’s mortgage rates (which are hovering around the low to mid 4s) homeowners using 15 year fixed rate loans pay 64% less interest than homeowners using 30 year loans. Not to mention the fact that they can own their home outright in half the time.

That said, there is one significant downside to choosing a shorter term mortgage: higher payments. According to a recent article from The Mortgage Reports, the payments on a 15 year loan are 45% higher than those for a 30 year loan. This is due to the loan repayment being compressed into a shorter time frame. For a lot of homeowners, the higher payment negates the point of refinancing. For others, who purely want to pay off their loan sooner and pay less interest overall, the refinancing to a shorter loan makes sense.

Remember, this method won’t work for everyone, as some mortgages do not allow shorter amortization periods; however, if you are able to refinance to a shorter-term loan, you’ll find that your amortization will be accelerated, allowing you to build equity faster and pay off your mortgage sooner.

Other Options

Prepay

Instead of opting for a shorter term refinance, which will include higher monthly payments, some homeowners choose to prepay their mortgage instead. Prepaying simply means sending extra payments to the lender that will be applied to principal. For example, some homeowners round up their monthly payments to the nearest tenth or hundredth place (instead of paying $862/month, they pay $870 or instead of $1,250/month, they pay $1,300). It might not seem like much, but over the years it really adds up.

Other options include sending in one additional full mortgage payment each year, putting extra money toward the mortgage if you experience a windfall or get a bonus from work, and just making extra payments whenever you can.

This is a great choice for people who want to pay off their loan sooner but don’t want to be locked into a higher monthly mortgage payment.

Refinance & Prepay 

This method, also known as refinance-to-prepay, is exactly what it sounds like. It is when a homeowner refinances their mortgage to a lower interest rate only (does not change the loan term) and then prepays on the new loan using the total monthly savings.

Let’s use an example to illustrate. Let’s say you bought a home for $250,000 two years ago and you currently owe $193,124. And let’s say you are refinancing that balance from a rate of 4.75% that you got two years ago to a 4.00% mortgage rate available now (30 year fixed rate terms). After refinancing, your monthly principal and interest payment will be about $120 less. You would simply take that $120 savings and send it to your lender along with your regular payment. Doing this can shorten your loan payoff time by approximately 4 years and help you save more than $32,000 in total interest.

Keep in mind however, that with refinancing often comes closing costs, which must be accounted for when calculating your savings. Speak with one of our mortgage professionals to get a better understanding of how refinancing may work for your situation. Simply complete the form on this page or give us a call at (866) 544-7013.

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Dallas Business Journal Names The Cooksey Team to ‘2017 Best Places to Work’

DALLAS, Texas, July 10, 2017 (SEND2PRESS NEWSWIRE) — The Cooksey Team, a top producing retail branch of Mid America Mortgage, Inc., announced today it has been recognized by Dallas Business Journal as one of its “2017 Best Places to Work” in the Dallas-Fort Worth area. More than 500 companies submitted nominations, and only 100 companies were honored.

The Cooksey Team - best 2017
Now in its 15th year, the “Best Places to Work” award showcases outstanding employers of all sizes in the North Texas region, and winners are selected based on a survey of employees conducted by Quantum Workplace, a third-party research firm specializing in employee engagement and experience.

In the survey, employees are asked to rate their workplace based on six categories, including:

  • Communication and resources;
  • Individual needs;
  • Manager effectiveness;
  • Personal engagement;
  • Team dynamics; and
  • Trust in leadership.

“My philosophy has always been, ‘If my staff doesn’t succeed, then I have failed,’ and that’s the approach I’ve taken from day one,” said Michael Cooksey, founder of The Cooksey Team. “Having incorporated The CORE Training methodology into our overall professional development program, I’ve seen my staff achieve amazing results while also delivering an exceptional customer experience to borrowers, and to have those efforts recognized by not only the Dallas Business Journal, but also my staff is truly an honor.”

To view the full list of “2017 Best Places to Work,” visit http://www.bizjournals.com/dallas/news/2017/06/26/2017-best-places-to-work.html.

About The Cooksey Team:
Headquartered in Dallas, The Cooksey Team is a top performing retail branch of Texas-based lender Mid America Mortgage and has offices located throughout the North Texas and Los Angeles County areas.

With 16 years in the industry and nearly $800 million in funded loans with Mid America, Cooksey Team Founder Michael Cooksey brings the experience and knowledge needed to lead a successful mortgage transaction. Utilizing The CORE Training methodology, Michael has coached his own staff, as well as loan officers, brokers and real estate agents across the country, to become top producers. Cooksey Team loan officers average six closings per month and $250,000 in annual income.

In addition, the branch has increased its annual origination volume by nearly 50 percent year-over-year and is projected to achieve over $300 million in volume in 2017. For more information on The Cooksey Team, visit http://cookseyteam.com.

About Mid America Mortgage, Inc.:
Mid America Mortgage, Inc., Addison, Texas, is a multi-state, full-service mortgage lender serving consumers and mortgage originators through its retail, wholesale and correspondent channels. In operation since 1940, Mid America has thrived by retaining its entrepreneurial spirit and leading the market in innovation, most recently with its adoption of electronic mortgage closings (eClosings) and promissory notes (eNotes). We offer a wide range of residential home loan programs to meet the needs of most home buyers and homeowners, and are also the nation’s leading provider of Section 184 home loans for Native Americans.

Mid America is looking for tech-savvy, service-oriented mortgage professionals to join its growing team. We are dedicated to providing our employees with industry-leading tools and technology to deliver a great package of competitive pricing, programs and knowledgeable service. Want to join our team? Visit http://www.midamericacareer.com/.

Additional information about Mid America Mortgage, Inc. can be found on the company’s website at http://www.midamericamortgage.com/about/.

Twitter: @midamericamtge @TheCookseyTeam

News Source: Mid America Mortgage, Inc.

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Buying a Home Sight Unseen Becoming More Common

house key

Thanks to massive advancements in technology, the number of people buying a home without seeing it in person first is on the rise.

According to a recent survey conducted by real estate listing firm Redfin,  one in three recent home buyers (33%) made an offer on their home sight unseen. This is up from one in five (19%) a year ago. 

Agents and other industry professionals are saying these bids are becoming more common in markets where homes sell quickly or where there is a higher interest in real estate among foreign buyers.

Although rising demand surely is the driving force behind this trend, another component – mobile and communication technology – has likely aided in the increase of sight unseen home purchases. According to a recent article from Builder magazine, many sight unseen bids start with tours conducted via smartphone or videoconferencing. These methods of communication can provide potential buyers with a genuine look at the property in real time, without enhanced listing photos or misleading descriptions. Some brokerages are even putting together 3D photograph and video tours of their listed homes, which can be viewed by interested buyers who have access to a virtual reality headset.

However, with VR technology still very new, it’s more likely that the majority of sight unseen buyers are utilizing the more well-known and more easily accessible apps like Skype, Whatsapp or FaceTime.

Sight Unseen Home Purchases & Millennials

According to the results of the Redfin survey, millennials (those who reached adulthood around the year 2000) are three times more likely than their baby boomer predecessors to buy a home sight unseen.

Forty-one percent of millennials surveyed by Redfin said they had made an offer on a home without first seeing in in person. This is up considerably from the 30 percent of Gen-Xers and 12 percent of Baby Boomers who said they had.

“Millennials are already starting to set trends in the real estate industry,” said Redfin chief economist Nela Richardson. “They are three times more likely than Baby Boomers to make an offer sight-unseen, and they’re more likely than older buyers and sellers to negotiate commission savings.”

Changes in Housing Affordability May Influence Sight Unseen Purchases

The rise in sight unseen home purchases may also be partly due to changes in economic factors. As real estate prices continue to rise in areas with the highest housing demand, it follows that potential buyers who are relocating to these areas may have to make an offer on a home sight unseen in order to get ahead of the competition.

Other economic concerns may also be influencing how, when and where Americans are buying homes. According to the Redfin survey, 40 percent of respondents cited affordable housing as their top economic concern, followed by the income gap between the rich and poor (38%) and the federal budget deficit (27%).

Because so many millennials are struggling with financial burdens like stagnant wages and student loan debt, it’s not surprising that one in five respondents said rising home prices caused them to search for a home in another metro area. Finding a home in a different city may prompt more buyers to place bids before they see the property in person.

Thinking about making an offer on a home, sight unseen? Follow these tips:

  1. Work with an excellent real estate agent. Find one who is experienced, familiar with the area, and is tech-savvy.
  2. If possible, send a representative on your behalf (other than the real estate agent) to scope out the home. This could be a family member or trusted friend who is familiar with your taste and preferences.
  3. Don’t take listing photos at face value. Too many listings use photos that are either out of date, overly enhanced, or shot at angles that make the rooms appear more spacious than they actually are.
  4. Always get a video tour. You and your agent can either set up a real time video tour via FaceTime, Skype or another similar app, or you can get the agent to create a video tour that he or she records and then sends to you for review.
  5. Opt for the real time tour if at all possible. Pre-recorded video tours don’t allow you to ask questions on-the-spot like, “can you show me the master bedroom again?” or “is that hardwood or laminate?” or “what’s that huge stain on the carpet??”
  6. If at any time you feel completely overwhelmed and unsatisfied with the information you’ve been able to gather about the home in question, STOP! Don’t force yourself to put in a bid sight unseen if you’re not feeling confident about the home. Remember, there will be other properties that come along, plus you can always use the extra time to continue saving for your dream home. Buying a home is a HUGE decision and should not be rushed into.

Related Topics

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While home prices climb, mortgages remain affordable

real estate value chart

A recent article from CNN Money pointed out that while real estate prices are skyrocketing across much of the country, the cost of getting a mortgage is actually staying pretty low. To back up this claim, CNN Money’s Kathryn Vasel shared some of the latest home price data and spoke with a leading expert in the industry.

According to the National Association of Realtors (NAR), the median existing home price climbed to $252,800 in May. This surpasses the last peak that hit in June 2016 of $247,600. As Vasel reiterates, home prices have been on the rise month-over-month for more than five years.

Although higher home prices and more robust real estate values can indicate a healthy market, if prices don’t level off eventually, it could push certain buyers out of the market, namely those in the lower or middle income brackets. A shortage of available housing inventory has only helped spur the growth of home prices, as demand gets more intense across the nation.

But while home prices continue to grow, the cost of financing a home has stayed relatively low.

“Falling mortgage rates help to soften the blow of rising home prices,” said Keith Gumbinger, vice president of HSH.com in the CNN Money article.

Gumbinger went on to explain how mortgage rates increased to more than 4% in the weeks following the presidential election, likely due to high hopes for economic improvements. However, as this optimism began to wane, mortgage rates began to drop back down to the near-historic lows we’ve seen for the last decade.

“After the elections, there was fantastic enthusiasm we would get fiscal policy changes and the economy was going to drive forward faster,” Gumbinger told CNN Money. “Not a whole lot has been accomplished on that front…and that has confused the market and dampened enthusiasm.”

But what about the future of mortgage rates? Can we expect rates to stay this low? Most likely not; however, mortgage rates are expected to see a gradual rise over time and remain fairly low for the foreseeable future, Vasel writes. This is probably an accurate assessment, even though it’s difficult to say how mortgage rates will move with any real certainty. After all, mortgage rates are influenced by a variety of economic factors, many of which change on a quarterly or even monthly basis.

According to Vasel’s source, we may see a small peak where rates move to 4.5% between now and the end of the year. Therefore, if you’re on the fence about locking in a mortgage rate, it may be best to do it sooner rather than later.

Related Stories

 

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New Home Sales Increase in May

home sold sign

New home sales got a small boost in May, signaling continued growth in new construction and builder confidence.

According to a June 23 press release from the National Association of Home Builders (NAHB), sales of newly built, single-family homes rose 2.9 percent in May to a seasonally adjusted annual rate of 610,000 units after an upwardly revised April reading. The data comes from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

“We are seeing solid overall growth in new home sales this year,” said Granger MacDonald, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Kerrville, Texas. “Sales are up more than 12 percent from this time last year, and we expect continued gains throughout 2017.”

Inventory of new homes for sale was 268,000 in May, which reflects a 5.3-month supply at the current sales pace. Typically, a market with less than six months of supply is considered a seller’s market.

“This month’s report is in line with our forecast, and consistent with solid builder confidence readings,” said NAHB Chief Economist Robert Dietz. “With more consumers entering the market, further job growth and tight existing home inventory, the new home sector should continue to expand.”

Regionally, new home sales showed moderate increases in two regions and fairly sharp declines in the other two. According to the NAHB press release, new home sales rose 13.3 percent in the West and 6.2 percent in the South. Sales of new homes dropped 10.8 percent in the Northeast and 25.7 percent in the Midwest.

What this could mean for the U.S. housing market

With sales of newly built homes gaining momentum, it could be a good sign that inventory is continuing to work toward meeting demand. Although there is still some disparity between supply and demand in much of the country, new home sales could be the key to closing the gap.

This also provides evidence that home builders could be seeing more work and more opportunities for development in the coming months. With builder confidence continuing to maintain healthy levels, May’s new home sales data reflects the trends behind that growth.

 

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Builder Confidence Remains at Healthy Levels

home builders

Builder confidence in the market for newly-built single-family homes showed a slight weakening in June, down two points to a level of 67 from a downwardly revised May reading of 69 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Despite the minor drop month over month, levels of builder confidence have remained fairly steady so far in 2017.

“Builder confidence levels have remained consistently sound this year, reflecting the ongoing gradual recovery of the housing market,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas.

The challenges builders currently face, it seems, are labor shortages and a shrinking inventory of available lots.

“As the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family sector,” said NAHB Chief Economist Robert Dietz.

About the HMI

The HMI is derived from a monthly survey conducted by the NAHB. For 30 years, the NAHB has been conducting a survey to gauge home builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective home buyers as “high to very high,” “average” or “low to very low.” Each component’s scores are then used to calculate a seasonally adjusted index where any number higher than 50 indicates that more builders view conditions as good than poor.

June 2017 HMI Findings

According to the data from June’s HMI, all three components of the index posted losses in June; however, they all remain at healthy levels.

  • The components gauging current sales conditions for newly-built single-family homes dropped two points to 73.
  • The index charting sales expectations in the next six months fell two points to 76.
  • The component measuring buyer traffic also moved down two points to 49 – the only component that fell below 50.
  • Regionally, the Midwest and South each dropped one point to 67 and 70, respectively.
  • The West lost two points, bringing the region’s level to 76.
  • The Northeast also fell two points to 46 – the only region with a level below 50.

What We Can Derive From the HMI

The HMI results can tell us how actively new single-family homes are being constructed, how levels of construction may increase or decrease in the near future, and how levels of demand for new homes may influence these components. From June’s HMI, we can safely assume that builders remain highly confident that sales conditions are favorable for newly-built single-family homes. We can also deduce that sales are likely to continue, or possibly increase, within the remainder of 2017. Finally, we can conclude that the number of buyers is likely to remain fairly consistent, though the northeastern states are less likely to see as much activity.

Related Topics

Builder Confidence Remains Steady in April

Housing Affordability Shows Improvement in First Quarter

FHA Mortgage Delinquencies Jump in Fourth Quarter

 

 

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Baby Boomers Turning to Real Estate to Afford Retirement

baby boomers looking at computer

As the cost of retirement continues to increase, and with 10,000 baby boomers retiring every day, it’s not surprising that more and more aging boomers are looking for alternative methods to boost their savings. According to a recent article from Forbes, many baby boomers are discovering that their retirement plans are not sufficient for their needs and are turning to real estate investments to compensate.

In addition to baby boomers who don’t have enough saved for retirement, around 30 percent of baby boomers have no retirement savings at all. Among those who do, about one-quarter have less than $50,000 saved, according to research by GoBankingRates. In a world where pension funds are becoming less common, and fewer companies offering employer-led 401(k) plans, it’s not shocking that boomers are facing this dilemma.

In addition, boomers who had their retirement savings depleted due to the crash of ’07 may be wary of making further investments in securities.

“The alternative investment world doesn’t become popular until it’s time for people to retire,” Entrust Group Director of Professional Development John Paul Ruiz said in a June 21 Forbes article. Entrust provides services for self-directed individual retirement accounts (IRA), which allow for alternative investments like real estate. “Many of our clients think, ‘What other types of investments can I hold in my IRA that are outside the securities world because I can’t handle another crash?’,” Ruiz explained.

While many of those approaching or entering retirement are turning to commercial real estate, many others are choosing to invest in smaller, residential ventures. Buying a single-family home to rent out to long-term lessees, or purchasing a vacation home to cash in on short term rental agreements are two common methods of bolstering retirement funds while the property itself gains equity over the years.

According to an article from Investopedia, those facing retirement without the funds they need may do very well with an income-producing property, but caution should be key. Buying the wrong property at the wrong price and with the wrong terms can lead to more financial woes. Timing is also important.

According to some mortgage professionals, if you plan to finance your purchase with a mortgage, you should take action before you retire. Typically, mortgage lenders require potential borrowers to be employed and have at least two years of steady employment history in the same occupation.

If you’ve already retired, you may still be able to get a mortgage, but your terms and interest rate may not be as favorable. Instead, it may make more sense to purchase the investment property with your retirement funds and not rely on financing. Consult with a financial adviser and experienced real estate professional before making a final decision, as this method can be risky. If the home fails to produce the income you need, then not only will you be stuck with a home that isn’t generating money, you’ll also have lost your retirement savings.

If you can get a mortgage, but don’t have the cash to make the typical 20-30 percent down payment (usually this is required if the borrower will not be occupying the home), consider using your IRA funds (if you have an IRA). All equity growth and income from rental receipts will grow inside your IRA tax-free, according to John Walters of LeWalt Consulting Group in St. Petersburg, Fla.

Once you know how you’re going to buy the rental home, you’ll want to consider how you’re going to cover the ongoing expenses associated with being a landlord. These costs include…

  • HOA fees
  • Maintenance/repair costs
  • Property management fees
  • Loss of income during vacancy
  • Property taxes
  • Homeowners insurance

Naturally, you’ll try to get the highest rental rate you can while staying competitive. However, there will be times when costs arise that may not be covered by the rent you’re charging. Some real estate professionals recommend factoring an occupancy rate of no higher than 92 percent when estimating your expenses and profit.

Again, it’s best to consult with a CPA, financial adviser and investment real estate agent to determine the best course of action for your situation.

Related Topics:

Zillow Research Reveals Most Homes Can Be Rented Out For A Profit

How Much Should The Average Person Save for Retirement?

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Zillow research reveals most homes can be rented out for a profit

couple in front of house for rent

The majority of U.S. homes could be purchased and rented out for a profit, according to the latest findings in a Zillow Research study.

According to a June 19 article on the Zillow Research site, small investors in 25 of the 35 biggest U.S. markets could most likely buy a home and rent it out for a profit, with the exception of a handful of high-priced metros along the West Coast and the Northeast.

Zillow did some number crunching to determine where rental revenue on investment property will exceed the monthly fixed costs of homeownership (mortgage payments, property taxes, insurance and HOA dues). According to their findings, the vast majority of homes in 25 of the 35 largest U.S. markets would be suitable for the math to work out in the investor’s favor.

“In each of these markets, at least 70 percent of homes can be purchased and rented out for more than their fixed monthly expenses, and in 17 of them, 9- percent of more of the homes meet that criteria,” writes Jamie Anderson, data scientist at Zillow Research. “But in nine particularly pricey markets (and almost in another), prices on the majority of properties are high enough that rental payments won’t cover the costs of ownership.”

Where Being a Landlord Doesn’t Pay

San Jose, California is the heart of Silicon Valley and one of the least affordable places to call home. Only five percent of homes here can be rented out for more than the monthly expenses involved in owning them, according to Anderson.

Moving a few miles north to San Francisco won’t help much. Here, only about 1 in 7 homes (14.3 percent) are likely to produce a positive net monthly cash flow.

Anderson goes on to point out that in another seven metro areas, between 23 and 49 percent of homes can be rented out for more than their mortgage. These areas include…

  • Los Angeles (26 percent)
  • San Diego (30 percent)
  • New York (40 percent)
  • Sacramento (40 percent)
  • Boston (45 percent)
  • Seattle (46 percent)
  • Portland (49 percent)

What may be somewhat surprising to many, more than half of homes in the nation’s capital of Washington, D.C. (54 percent) can be rented for more than the cost of ownership, but just barely.

So what makes these markets less profitable for investors? According to Anderson, these markets are within the top 10 most expensive major housing markets in the nation. Also, Anderson points out that while rents are high in these markets, home prices are also considerably higher.

“Nationwide, the full purchase price of the average home is equivalent to 11 years of the median U.S. rental payment,” writes Anderson. “In the most expensive markets, it would take almost double that length of time – more than 20 years of rental payments – to pay for the price of a home in full. If expected home and rent price appreciation were projected to be the same across all markets, we would expect all markets to have a similar price-to-rent ratio. But that’s not what happens: In more expensive markets, home values are a higher multiple of annual rental payments.”

Despite these markets being mostly unprofitable for small investors, the research did find that, within these markets are small, affordable “pockets where home prices are modest enough that rent payments should cover monthly ownership costs.”

In Seattle, for example, there are very few homes that can be rented for more than the costs of homeownership within the city proper or along the eastern shore of Lake Washington. However, travel north or south of Seattle’s city limits and you might find better deals in the middle-class suburbs of Lynnwood and Renton. Most homes in these areas can be rented out for a profit, according to the Zillow Research data.

Where Being a Landlord Does Pay

According to the data, Zillow Research found that 25 of the nation’s 35 biggest major metros were conducive to renting out for a profit. In 17 of the 25, more than 90 percent of homes were able to be rented out for a profit.

The five markets that have the highest share of homes that can be rented for a profit include…

  • Indianapolis (98.7 percent)
  • Kansas City (98.5 percent)
  • Cincinnati (98.4 percent)
  • Cleveland (98.2 percent)
  • San Antonio (97.9 percent)

Rounding out the top 10 are Atlanta (97.3%), Detroit (97.1%), Dallas (96.9%), Orlando (96.8%) and Houston (96.6%).

Thinking of Buying Rental Property?

Being a landlord is a big responsibility and it’s not for everyone. But for the right person, owning rental property can be a great way to diversify investments, supplement monthly cash flow and build overall wealth. If you’re considering being a landlord and purchasing an investment home, start by researching investment property financing and second home loans.

Investment Property Loan vs Second Home Loan

With an investment property loan, the borrower can use the anticipated rental income to qualify but the interest rate may be higher, along with the minimum down payment. This option is best suited for those interested in buying a home that will be rented out to long term tenants.

By contrast, a second home loan is essentially the same as a mortgage for a primary residence; however, the property must be occupied by the borrower a certain number of days out of each year. This option is better suited for those interested in buying a vacation rental or short term rental home.

Want to learn more about rental home financing? Let’s talk. Give us a call at 866-544-7013 or complete the form on this page and one of our mortgage professionals will contact you.

The post Zillow research reveals most homes can be rented out for a profit appeared first on Mid America Mortgage, Inc..

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