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In some regions they’re called escrow accounts while in others they’re referred to as impound accounts. Either way, they’re essentially one and the same. An impound or escrow account is an account set up to regularly deposit a portion of the annual or semi-annual property tax bill and for renewal of an insurance policy. A mortgage payment includes an amount that goes toward the outstanding loan balance, or principle, while the remainder goes toward interest due the lender. Over time, the loan balance is paid off.
For those who also want to escrow for taxes and insurance, 1/12th of the annual tax bill is paid and held by the lender’s servicer. Each month, that amount increases and when the tax bill comes due, the lender pays the tax bill on behalf of the borrower. The same goes for an insurance policy. If an annual insurance policy is $1,200, then each month the monthly amount is $120. When it’s time for the annual renewal, the lender then renews the policy using the funds paid each month. The borrower needs to do nothing other than making the monthly payment. Should you create and escrow account to have the lender automatically pay your property taxes and insurance?
The first answer depends upon the amount of your initial down payment or equity position. For loan balances that exceed 80% of the value of the property, homeowners don’t have a choice. Lenders require escrow accounts when the loan balance surpasses this 80% level. This is an automatic when it applies to government-backed loans.
These loans are those guaranteed by the VA, FHA and USDA. VA and USDA loans don’t require a down payment and in so doing escrow accounts are a must. FHA loans, with a typical minimum down payment of 3.5% also require escrow accounts. With these loans, taxes are paid and insurance renewed automatically when due. Borrowers do nothing other than establishing a new escrow account. Some lenders require an initial deposit when creating a new escrow account, such as one or two months of payment.
Okay, so what if the down payment is more than 20%? It’s at this stage where the homeowners do indeed have the option of creating an escrow account. But, given the choice, should you? This is a personal choice. Some borrowers like the convenience of having their property taxes and insurance paid for automatically. Doing so means not having to come up with a large annual payment at the end of the year but instead the taxes and insurance are paid for via the escrow account.
Still others prefer to make their tax and insurance payments on their own. Homeowners may want to tap into their bank account when it’s time to pay the tax bill and insurance premium, keeping their money in the bank or in an investment account. But really, it’s nothing more than a preference. Personally I had always set up an escrow account when I bought a home, even with a good amount of equity in the property in the form of a down payment. It’s a convenience factor knowing the taxes and insurance are paid for automatically.
Question: Our HOA recently had a reserve study update which the board is evaluating to ensure that we are adequately funded. What is a proper funding level? I have heard numbers from "30% Funded" to "80% Funded".
Answer: 100% Funded is the most fair to all members and should be the goal. For example, if you have a 30 year roof that costs $90,000 to replace, you should reserve $3,000/year to be 100% Funded. Reserving anything less will produce a lower level of funding that will have to be made up in the future by others that shouldn't have to pay it. Being 100% Funded all the time insures that all members pay their fair share.
If you are currently, say, 40% funded, you should institute a plan to increase the level of funding to 100% over a period of years if possible. The board could also special assess to bring it up to 100% this year, although that might be a hard sell unless there is an urgent need, like that 30 year old roof is now 35 years old and leaking like a sieve. Sometimes special assessments are unavoidable because of inadequate funding in the past. But striving for 100% Funding today will eliminate the need for special assessments in the future.
Question: Our governing documents have policies regarding tree cutting and clearing. From time to time, the board gets requests from lot owners asking permission to cut a tree because of fear that it will fall on the house. If there is no disease or damage, we deny such requests. It has been suggested recently that the HOA can be held liable for damage and injury from falling trees.
Answer: The HOA is certainly liable for failing to maintain trees in the common area and should have a regular tree maintenance program to keep trees trimmed, healthy and safe. Trees located on private lots is another matter. If an owner maintains a tree is in danger of falling, it should either be obvious to a casual observer or be documented by an arborist. The board should make prudent decisions based on reliable information and safety concerns.
There is also a fire hazard presented by trees that are closer that 30 feet to the structure, especially if they are highly flammable like pine trees or in areas prone to drought and wildfires. If an arborist believes they are a danger, the tree should be removed.
A down payment is something you’re likely going to need to get a mortgage to buy a home unless you’re using a Veterans Affairs (VA) loan. Saving up for a down payment is one of the more significant barriers for many people that prevents them from achieving homeownership.
A down payment is an initial payment you make when you buy a house. Down payments are usually calculated as a percentage of the purchase price. The amount can be as little as 3%, but conventional mortgages are generally around 20%.
The specifics of a down payment requirement depend on the type of mortgage you’re applying for, the kind of property you’re buying, and your financial situation.
If you can make a larger down payment, you might be able to get a lower interest rate or buy a more expensive house. Large down payments can also mean you’re responsible for smaller monthly mortgage payments.
Lenders require down payments because it helps reduce their risk exposure. You’re investing in the home, so if you were to stop making your mortgage payments, you’d be walking away from a lot of money. Down payments also reduce how much a lender has to give you to make the purchase.
Not everyone has a large chunk of cash sitting aside to use to buy a house, however. There are down payment assistance programs available, some of which are detailed below.
Down payment assistance programs usually come from state housing finance agencies. Sometimes these programs are also managed and offered by cities and counties and nonprofit organizations.
Types of assistance might include:
• Grants, which are a gift of money that doesn’t need to be repaid.
• Forgivable, zero-interest loans, which don’t have to be repaid as long as the borrower still owns the home and lives in it after whatever the period is—usually somewhere around five years.
• Deferred payment, zero-interest loans, often require no payments until the home is sold, the mortgage reaches the end of its term or the mortgage is refinanced.
• Low-interest loans are available and have to be repaid over a certain period of time. These help homeowner spread their down payment and closing costs over a more extended period rather than having to come up with the money all at once.
Most programs offering down payment assistance are geared toward first-time buyers, but not all.
Even if you’ve already owned a home and a program says it’s for first-time buyers, often the program will define a first-time buyer as someone who hasn’t owned a home in the past three years.
There are also programs for specific demographics, like teachers or first responders.
Most down payment assistance programs will require that you complete specific steps, which vary depending on the program itself. For example, you might have to meet income limits or take a homebuyer education course. You could be required to buy in a particular location or stay below a certain maximum purchase price. Sometimes you’ll have to contribute your own money to your down payment too.
If you’re interested in learning more about down payment assistance programs, you can contact the housing finance authority in your state or your local city or county government. The U.S. Department of Housing and Urban Development (HUD) also has state-specific information.
The Consumer Financial Protection Bureau has a tool that will link you to housing counselors where you live.
If you are going to apply for a mortgage and use down payment assistance, you’ll have to find a list of mortgage lenders who are approved to work with that particular program. Often, the local agencies and programs assisting can connect you with experienced loan officers.
A mortgage the Federal Housing Administration backs is known as an FHA loan. FHA loans are unique from other mortgages and home loans. They’re often helpful for first-time homeowners because they offer a combination of a lower down payment requirement and lower credit score standards.
The following are some of the critical factors when it comes to qualifying for an FHA loan.
The minimum credit score for an FHA loan approval is 500. That’s lower and often significantly lower than lender requirements for traditional mortgages. The lower credit score requirements are a big reason this is an appealing program for first-time buyers.
While the FHA has guidelines for credit score minimums, that doesn’t automatically mean a lender won’t have higher requirements. FHA loans aren’t from the government directly.
Instead, they’re insured by the FHA on behalf of the lender.
Even though lenders’ risk is minimized because they have that backup, they may reduce their risk by having higher credit minimums. Just as you would with any other type of mortgage, it’s still important to shop around and compare FHA lenders to make sure you’re getting the best terms.
Also, even if you find a lender who follows the 500 minimum credit score, that doesn’t mean you won’t get lower interest rates and a better term if your score is higher than that.
The minimum down payment if you get an FHA loan depends on your credit score. If you have a score of at least 580, then your minimum down payment requirement is just 3.5%. If you have a score between 500 and 579, your minimum down payment is 10%.
There’s a term you may hear, which is the Minimum Requirements Investment or the MRI. That’s just another way to refer to your down payment.
When you’re applying for a mortgage, any lender will consider what’s called your debt-to-income ratio. It doesn’t matter the actual type of mortgage, but one difference with an FHA loan is that a lender looks at two ratios.
The first ratio is what the FHA calls the Total Mortgage Payment to Effective Income Ratio or PTI. This measure is the ratio of the potential monthly mortgage payments you might make compared to your monthly income. Your PTI can be up 40% with a credit score of at least 580.
Your debt-to-income ratio or DTI looks at a measure of your income before taxes that you spend on your debt payments every month. These debt payments can include your rent and mortgage, student loans, and credit cards. The highest DTI you’ll be allowed for approval of an FHA loan is 50%, and that’s only if your credit score is at least 580. You’ll also have to meet other qualifications.
There’s not any particular salary that blocks you from getting an FHA loan or qualifies you automatically. You do have to have a few things, however:
• You need at least two credit accounts established. This could be something like your car loan and one credit card, as examples.
• You can’t have any delinquent federal debt or judgments, including tax-related judgments against you or obligations linked to a previous mortgage insured by the FHA.
• If you’re getting cash gifts from friends or family to help with your down payment, or you’re getting money from anywhere else, you have to be able to account for them. The gifts need to be verified and signed by the person giving them to you.
Documentations you need to apply for an FHA loan include a valid government-issued ID such as a driver’s license.
You’ll need proof of a Social Security number and up to two years of pay stubs, tax returns, or W2 forms. Additionally, as was mentioned, if you receive any gift funds for your down payment, you’ll need signed documentation of those.
A property has to meet certain requirements as do you, for an FHA loan.
First, the loan has to be for your primary residence, and one borrower has to occupy the property within 60 days of closing. The home can be single-family, multifamily with up to four units if you occupy one, or a manufactured home as long as it’s on a permanent foundation.
You can’t use an FHA loan for an investment property unless it’s a multiunit property and you’re going to live in a unit.
The home can’t be a flip, which means you can’t buy it within 90 days of it previously selling.
Finally, you don’t have to be a first-time buyer to qualify for an FHA loan, even though many people who use this loan are. If you are a first-time buyer, there might be an advantage in that you could also get down payment or closing cost help through a state-based first-time buyer program.
In the midst of uncertain times, watch out for what you react to if you’re serious about buying a home.
This is an especially important caution if you are a first-time or a first-time-in-a-long-time home buyer.
We live in a “quicksand” time of shifting realities and emerging uncertainties. The pandemic overlay adds an unsettling craziness about environmental, political, financial, and personal crises.
First-time buyers are nervous enough about spending all their savings and becoming deeply in debt for decades. Add pandemic angst, inflation fervor, supply-chain shortages, holiday hype, and even the most confident home buyer may feel they are on shaky ground.
Buyers can work themselves into a frenzy of insecurity and self-doubt as they frantically search for THE ANSWER or for that perfect list of “10 Things Home Buyers Must Do.” Too often, they learn nothing new.
Remember, too much online content is marketing. Enticing headlines and must-have content are designed to attract and engage online traffic—you—not to educate.
What new advice are you searching for?
Haven’t you had advice from everyone—from parents and friends to social-media followers, from streaming series and endless Google searches to your real estate professional to…?
Feeling inundated with “do this” and “don’t do this” advice rehashed on all platforms, all screens, all the time? Real estate snippets and factoids pop-up everywhere these days. Compulsive searching and analysis paralysis set in and decisions become overwhelming!
At the same time, as a group, Millennial home buyers are taking the rap for eating up real estate inventory and driving up real estate prices.
Something familiar came to mind when I considered today’s often-besieged first-time home buyers:
“If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men [sic] doubt you…”
Thought-provoking words that I had not thought about for a while, but words that fit today. Not my words, but those of Nobel-prize-winning British writer Rudyard Kipling, author of The Jungle Book, who wrote those words in 1895 in his poem “If.”
A lot has changed since 1895—and since last week, for that matter—but Kipling captured the essence of self-discipline and determination that transcends time. That’s the mindset that buyers most benefit from during the process of making a real estate commitment.
In the poem If, Kipling speaks to a young boy explaining the attributes that will make him “a Man, my son.” We know now that self-discipline, maturity, resolve, and all that go with them are not gender dependent. It’s not my intent here to slide into poetry analysis or a discussion of the many topics that arise out of this thought-provoking poem.
My point: Not feeling absolutely 100% sure when faced with a new experience, a new decision frontier, is natural and normal—especially when you’re spending more money than you have and arranging a mortgage which lasts decades.
More sure than unsure may be your starting place. Certainty will come when you and your real estate professional find the specific property that fits.
The If stanzas presented here may help you wade through the sea of “Buyer Advice.”
Review what you have learned so far. Slow-down and think. Focus on exactly what you want to accomplish and dive in. What have you investigated in detail? What do you expect to do and react to during your property search, each viewing, offer preparation, and negotiation?
Open the lines of communication with your real estate professional, who has been through all of this hundreds of times. Share your fears and concerns. Clarify your goals.
“If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same…”
The last two lines are posted over the player’s entrance at Centre Court Wimbledon in England: “If you can meet with triumph and disaster and treat those two impostors just the same…”
Haven’t we watched Wimbledon Tennis Star Serena Williams repeatedly do just that?
“If you can fill the unforgiving minute
With sixty seconds’ worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be…”
… a successful real estate buyer!
Yes, home buying may be tough in these tough times. The search may be exhausting, even when everything goes perfectly from the first minute to the last, which it rarely does.
The If poem inspires what Victorians called stoicism or the British “stiff upper lip” attitude. We are moving away from that approach in many aspects of society and our lives, but in home buying it can come in handy.
Start by searching out a real estate professional who brings out the decisive best in you. Oops…knowing all the good that lies ahead for you, it’s hard to stop with the advice!
More of “If” on my blog “What’s Your Point?”