25 Apr Financing Real Estate in North FL
Real Estate Financing Process and Requirements in North FL.
When it comes to buying real estate, whether it is a an existing home, vacant land, planned construction, commercial, or producing agricultural land, the financing process and requirements are all going to vary. There are so many variables to this process it is impossible for us to address them all in one place without literally writing a book, but we get so many questions often about the process and what the requirements are, we wanted to take the time to provide a 1,000ft overview that we hope will help you decide what process is best for you, and give you some guidance in what to expect when contacting a lender to get the process started! Please do note- most lenders all have their own unique underwriting criteria, which is why it is important to ask questions and know what they’re looking for. This article should help you understand what things to check for and what can be factors in the process.
NOTE: If you’re looking for options where credit scores and previous situations (bankruptcy, short-sales, etc) would prohibit you from working with a typical bank/credit union/lender, then you should take a look at our existing article here: How to buy property when you can’t get a bank loan.
This is a lengthy article – so if you want to skip to the residential or vacant land areas, you can use the links immediately below:
Residential Financing in North FL
Vacant Land Financing in North FL
So with that, let’s started:
Florida Vacant Land Financing Terms
First of all it is important to understand that vacant land purchases are 9 times out of 10 considered higher risk by a lender, since it is not an occupied home stead, it is theoretically “easier” for an individual to default and thus is a higher risk.
Generally speaking for non-producing land (Which for the sake of this discussion I’m going to define as vacant land not currently producing any income in the form of trees, crops, livestock, or other agricultural activity. This would be vacant land used for recreation or holding until you build or further develop at a later time. It could be small lots or larger acreage). You’re going to be looking at anywhere from 20-35% of the property value as a down payment, and you’ll probably be 1-3 whole percent higher interest rate than prime. Adjustable interest rates are also not un-common.
For Example, if you’re going to purchase a $100,000 piece of non-producing land property you may need between $20,000 and $35,000 in money on hand as a down payment at the closing. And your interest rate may be something like 7.5% interest rate (Prime is currently y 5.5% as of writing).
The lender may or may not also require the following things about the property that you’ll have to pay for out of pocket in the process (In addition to providing your financials, more on that later);
- Land survey .
- Appraial.
- Phase 1 environmental (rarely).
For income producing agricultural land things get a little easier and better for you. There are many programs through the federal government such as the FSA (USDA’s Farm Service Agency) that competent lenders can underwrite through (in an effect, team up together on). This allows the bank to write a loan that is guaranteed/insured by the Federal Government if you were to default. Thereby lessening their risk, and in turn being able to offer you better and more competitive loan terms.
The property has to have a demonstrable income or future income potential (IE: from future timber sales). There are a many number of programs, but you may be able to get a loan for as little as 5% down and very competitive interest rates. These types of loans are reserved specifically for farmers and income producing agriculture properties, so there are more factors involved in the qualifying process, but if you and the property do qualify, you can get some of the best loan terms available. Talk to your lender about what types of uses or income on a vacant land property may qualify for these sorts of loans. Certain agriculture activities are considered higher monetary risk than others.
The United States Department of Agriculture’s Farm Service Agency also has what we refer to as “Direct” loans, whereas the agency themselves makes the loan direct to the consumer without another bank or lender involved. These programs are highly specialized and we will not cover them much here other than to provide a link to the section on the USDA website where you can research them a bit more yourself and perhaps contact the local FSA office for more information: https://www.fsa.usda.gov/programs-and-services/farm-loan-programs/
Lenders will require a “Loan Application Fee” with the submission of an application for loan. These can vary but generally are a few hundred dollars and cover the upfront cost of an appraisal. This is usually non-refundable. After this has been submitted along with other documentation that the lender requests from you, they’ll get the ball rolling on the loan process.
Residential Real Estate Financing in North FL
When it comes to financing residential property – There are important things to keep in mind. The particular loan you’re going to use can impact what type of property you buy. And, vise-versa, the type of property can have an impact on the type of loan you can get. So for this reason, it is important to be pre-qualified in the beginning so your real estate professional (us!) can help you best select a property that’ll work with your loan type.
We’ll cover several different scenarios and situations we often encounter that can be a factor in a residential mortgage, and then we’ll cover the more common types of loans and their process in more detail further below.
Acreage Limits: Generally speaking, residential properties with more than 20 acres are considered “non-conforming” loans and will be more difficult to finance for many lenders. They may be required to be done as a “portfolio” or “in-house” loan. Portfolio and in-house loans will generally require higher down payments, and be higher interest rates. It is important to clarify with your lender in the beginning whether this will or will not be an issue for them so you can adjust your property search appropriately.
Multiple Dwellings: More than one home on a property is also often considered “non-conforming” and will fall into the portfolio and in-house loan terms.
Mobile Homes: Some lenders have a strict policy of absolutely not doing loans on manufactured housing units, whether they’re double wides or single wide mobile homes. Our company does have the ability to connect you with lenders that do, but again if you’ve picked a lender out yourself, this is an important thing to clarify and know from the get-go. Even fewer lenders will finance properties with single wide mobile homes. Another issue to be aware of is what is called “resets”. This means the mobile home was originally setup in another location when it was new, then later on taken down, moved, and setup elsewhere. Often this may have been repossession units, or an owner may have wanted to move the home to another parcel of land from where it was originally setup. This can pose a significant problem and there are currently only a small handful of lenders that can process loans with reset mobile homes. As agents, we attempt to find this out early in the process, but sometimes the current owner themselves does not have the history or knowledge of it being a reset and only through a lender’s underwriting process is it discovered. As of 2018 we’re also seeing more lenders that do loans on mobile homes also requiring an engineering report for any porches or additions onto the mobile home to ensure they’re not causing any structural problems and are well made.
Properties needing significant and/or major repairs: Buyers often consider the idea of a “fixer upper” as a way to get a home and gradually work on upgrading it as time and money allows in the future. Depending on the severity of the repairs needed though, this may also be a problem for the loan and obtaining home owners insurance, which your lender is going to require! Most loans that are not in-house/portfolio will require a WDO (Wood Destroying Organism) test, and if there is wood rot anywhere on the home (including minor areas like door jams, eaves, porches, etc) it will have to be fixed. On some homes with significant damage or deferred maintenance, this can be a major problem. The seller may not be in the position financially or physically to have the repairs completed, and you may or may not be either. Low down-payment loan types such as VA, FHA, USDA Rural Development also all have their own requirements for property condition. An appraiser, appraising the value of the home, will also notate anything with the home that does not meet those individual loan requirements also. Most likely these items would need to be remedied prior to closing. Common “gotchas” include broken or fogged windows, non-functioning major mechanicals (IE, heat/ac, water, electrical service, etc.), missing appliances, significant signs of settling in the foundation, peeling and flaking paint (even on accessory structures), damaged floor covering, and more. These items are subjective based on the particular loan type, and what that appraiser notates on their appraisal as needing attention to conform to that particular loan. Conventional Loans are the most forgiving for these things, while VA Loans are usually the strictest.
Older Homes: In homes more than 25 years or older, other things to consider is roof life (minimum 5 years remaining for most home owners insurance companies to cover), Heating and cooling system, old or unsafe wiring, general electrical issues, any potential plumbing issues, and they’ll check the type of fasteners used on the roofing. The home owner’s insurance company you choose is probably going to require what is called a “4 point inspection” (This is separate from your regular home inspection and is in a special format for insurance companies, but most home inspectors can provide a separate report in this format if they’re already doing a general home inspection, or they can provide a stand-alone 4 point report also) on any home older than 25 years. You should check with them on this ahead of time to prevent delay during the financing period, as your lender is going to have to have coverage through your home owners policy also by closing.
Residential Loan Types
In-house / Portfolio Loans: These loans typically have the most flexibility when it comes to the property qualifications. They also have the largest down payment requirements. You’ll see down payment requirements in the neighborhood of 20-30 percent depending on your individual creditworthiness. The interest rates may be higher, and 5-1 ARM(Adjustable Rate Mortgages) are not uncommon. Shorter loan amortization schedules (Say from 30 years to 20) is also not uncommon. The lender does these things to mitigate their risk in the loan since it is unlikely they’d be able to put it on the secondary market (to sell the loan to others lenders), and it doesn’t conform for any government programs where the bank is insured against the loss if the loan does default. Therefore, these are the “higher risk” loans, and subsequently require more to help mitigate that risk. The trade-off is, you’re able to finance just about anything usually if you meet their terms. These are also useful for flips and investment properties.
Conventional Loan: Conventional loans typically have a minimum down payment requirement of 5 to 10 percent. These loans usually have the second most flexible terms as far as property requirements, but they may also require a higher a higher credit rating than others (around 640 but varies). Conventional loans are used for second homes, investments, or primary residences. You’ll also have to pay mortgage insurance called PMI in your monthly payment until you have at least 20 percent equity in your home. Your lender will probably escrow your property taxes and home owners insurance yearly going forward, but you’ll also likely be required to pay for the first year’s home owners insurance up front at closing, also.
Regular FHA (203b)Loan: The FHA loans are popular because they require as little as 3.5% down payment, and they can be utilized with lower credit scores down to as low as 580 (At the individual lender’s underwriting approval discretion). The FHA loans do have certain appraisal requirements – and as mentioned above, homes that need repairs may be problematic for the typical FHA loan. The FHA 203k however is an option for homes needing repairs or significant modifications, see below. There is also a special addendum to the purchase contract dealing with FHA loans that requests a seller to pay for X dollar amount of appraisal repairs, if any are needed. As mentioned above, a seller may not be in the financial or physical position to make these repairs. We often see contracts with these fields zero’d out so the seller is not obligating themselves to any additional expenses on the transaction. FHA 203b Loans are restricted to owner-occupant primary home purchases. No investment properties or second homes.
FHA 203K Loan: This is a specialized loan that allows a borrower to mix in the cost of the home purchase, and also repairs or upgrades into the single loan amount. These loans take a considerable amount of time to process. Bids for the work and significant documentation must be completed during the process and submitted to the lender. The lender will only accept bids from certain qualified licensed contractors. Contractors not already approved by the lender must complete an application and other paperwork for their quote to be considered. These loans are often the most beneficial to a borrower attempting to buy a home that needs considerable work. The trade-off is they’re very time consuming to complete and there are a significant amount of steps to the process. Not every lender is able to offer 203K repair loans.
USDA Rural Development Loan: Rural development loans are a program through the federal government that encourages home ownership in rural, less populated areas. They are a 100% Loan to value loan. Most all of the regions we serve qualify for the RD loans. There are certain caps on the purchase price, on a county by county level, in order to qualify for a RD loan the sale price cannot exceed that cap. Rural development loans are restricted to primary residences only. A borrower will have their taxes and home owner’s insurance escrowed, and the borrower will also have to pay for private mortgage insurance in their monthly payment as well. Rural Development loans have some requirements for the subject property to meet condition wise, but generally speaking, if there are no hazards and it is in fair livable condition, it should be okay, but this is subject to an appraiser’s approval. A lender will likely require the home to pass a WDO, and water test.
USDA Direct Loan: The USDA also offers direct residential loans to borrowers with low income. These loans are made through the local USDA area offices. The borrower and the property both have specific criteria that must be met in order for a direct loan to be utilized. For more information the USDA Direct Loans, see this page on their website: https://www.rd.usda.gov/programs-services/single-family-housing-direct-home-loans/fl
VA Home Loan: VA Loans are another 100% LTV loan. This is an extremely favorable loan to the borrower but it does come at the expense of some additional hoops to jump through in the loan process for both the borrower and the seller. Like the FHA Loan, there are specific requirements the home must adhere to. The VA Loan is one of the strictest, and therefore is not a good idea for a home that is not already in tip-top condition. The appraiser will make sure that the property meets the MPR (minimum property requirements). If it doesn’t, it’ll have to be remedied prior to closing. In most cases the home will need to be truly in turn-key ready condition, and something as minor as noticeable carpet soiling could become a NOV (Notice of Value) issue on the appraisal that must be resolved. Also like the FHA, there is a specialized addendum to be utilized with the contract when a buyer is using a VA Loan. This addendum provides for an appraisal repair amount the seller is obligated to, it makes it where a borrower cannot lose their deposit if the property does not appraise out, and it also further obligates the seller to pay for some of the buyer’s loan fees, as well as provide a recent WDO inspection for the buyer and their lender. A water quality test must be completed as well. For this reason, VA Loans are sometimes felt as a bit burdensome by sellers, as there are a lot of additional obligations on their part and in the process in general. For the buyer, it usually just means the loan is going to take a little longer than most others, and 45 days is about the norm in our experience.
As you can see by the myriad of different types of loans, and the requirements associated with them, it’s extremely important to be pre-qualified. This way your lender can help pick the most appropriate loan type for your financial situation, and we will be able to make sure we’re only picking and showing you properties that match your specific loan type as well as budget.
It’s important to note and understand, that even with the 100% LTV type loans, as the buyer, you’re still going to have some out of pocket expenses. The loan application fee to cover the appraisal, the cost of any home inspection, water test if needed, and possibly the first year’s home owners insurance. At the closing there are bank lending fees that are charged to you that must be paid also. Your lender will provide you with an initial CD (Closing Disclosure) upon completing your application. This will tell you approximately how much your loan expenses will be. A 100% loan just means that they will do up to 100% loan value, it doesn’t mean the loan is 100% free. In addition to any up front inspection costs or repairs that you wind up needing to do, there will be loan fees, that have to be paid when the closing comes also. Talk to your lender about this they can explain them to you and they’ll work with you to make sure you’re adequately prepared
What you need to provide to a lender for most all loan types.
This is not intended to be an exhaustive list, but a general over view of the documentation a lender will need to get started in the process of qualifying you and also working towards doing the loan approval. The exact documentation will vary depending on too many factors for us to cover here, but the below items will give you a guide of what to expect to hand over to the lender. Whoever you decide to use will also of course help you through the process and let you know what all exactly they need. BUT, if you have these things ready and available you’ll be ahead of the game!
Last two years tax returns: If you’re earning employee income, this is fairly straight forward. If you’re self-employed or have multiple income sources this can get a little more complicated in documenting, but fear not, your lender (whoever you decide on!) will let you know exactly what they will need.
Last two bank statements: For your main checking account and any other accounts. Savings, retirement, investment, etc. accounts you may have.
Last two pay check stubs: Establishes and documents your income from your employer. If you’re self-employed, then a P&L statement may be required. If on social security, a statement of benefits may be required.
Financial Statement: This form will be provided to you by the lender but you’ll document your incomes, existing debts and liabilities, and a few other things.
Glossary Of Terms
Escrowed Expenses: These are expenses associated with home ownership that your lender collects over a period of time and puts in a separate account to pay for them when they come due. This is usually your annual property taxes and home owners insurance. When making a purchase though, some additional money could be escrowed for repairs that have to be completed on the home within a certain time frame after closing as well as a condition of your loan approval.
PMI (Private mortgage insurance): For conventional loans not backed by a government program, there is private mortgage insurance. This insures the lender against your potential to default on the loan. The expense of this insurance is passed onto you the borrower and usually is an amount rolled into your loan along with an additional monthly fee until you have at least 20% equity in your loan, where PMI is no longer needed.
Seller Concession: A specified amount that the seller has agreed to credit you. This can be a concession for the value of repairs, or any other number of things. A lender will sometimes say that you need a concession of X percent to help cover your loan origination costs. This comes out of the seller’s proceeds and is an additional expense on their part, effectively lowering the sales price by an equal amount. IE; $100,000 sale price with a 3% Seller concession means the seller is really selling for $97,000 and not $100,000. If you need a seller concession in order to qualify for a loan, it is extremely important to know this up front before negotiating a contract, as coming back to asks for it later on is usually not well received by a seller as you’re asking them to accept less money than they’ve already agreed to.
Loan to value (LTV): The percentage of the value (determined by the purchase price, or the appraised value, whichever is lower) that a bank is willing to lend money on. Higher LTV loans are higher risk, and usually backed by a government program to help insure the lender against losses. Or, uses PMI. The higher the LTV, the less down payment you’re required to have.
100% Financing: A term used casually for certain loans like the VA and USDA Rural Development. It’s 100% LTV (See above), but doesn’t necessarily mean you can get the loan with $0 money out of pocket. There will be loan fees and other expenses throughout the process still.
WDO Inspection: Wood destroying organism inspection. This is required for most all loan types. Checks for pre-existing WDO damage (Termites, wood rot fungi, wood boring beetles, etc), as well as any current signs of infestation. Any current signs must be treated and/or removed with a follow up inspection to verify the changes.
Water Test: This is a water sample test collected from the subject property and then taken to a lab for analysis to test for water quality. Water tests are extremely finicky and prone to contamination while sampling. We recommend you hire a trained expert to collect the sample as it is very easy to allow contamination in the test kits available from the health department that will give false positives and require a retest. We’ve had instances where a sample was collected multiple different times by individuals fail the test, but once collected by a trained professional, pass. Handling the samples and collecting them is extremely delicate.
Appraisal: An opinion of value. Established by an appraiser’s in person review of the property, searching and selecting comparable sales, adjusting for differences in features or amenities, and ensuring the subject property meets the particular loan’s requirements. Must be ordered by the lender and comes from a pre-determined pool of available appraisers. Any other appraisal may not be used for bank lending purposes. The appraisal must come through the lender’s ordering process.
4-Point Inspection: Used for home owners insurance purposes in homes more than 25 years old to help establish the condition and risk of insuring it. Checks the roof, electrical, plumbing, and heating/cooling systems. Inspector prepares a report in a specific format for the home owners insurance company to review.
Survey: A written drawing of collected physical coordinates indicating the boundaries of the property and major improvements therein. The lender may say that they “don’t require a survey”, but they most likely will require a “Florida Form 9 Title Insurance Endorsement”. If they say they don’t require a survey, ask them if they need that Florida Form 9. The only way to get a Florida Form 9 from the title company, is with a survey.
Underwriting: The department at the lender that reviews all documentation (your financials, the purchase contract, appraisal, water test, wdo, title insurance policy, pretty much everything) and decides whether it is sufficient, or not, or if more additional documentation is needed to clarify something. Not uncommon to provide a document underwriting requests, and then have underwriting also ask for additional documentation as follow up.
Loan Processor: An individual at the lender that usually works with your loan officer and the underwriting department to help collect documentation, and act as an intermediary for the underwriting department since they do not communicate directly with consumers or their agents.
Loan Officer/Originator: Walks you through the beginning stages of the process, explains what their rates, terms, and loan programs are, collects an initial application from you, prepares and shares an initial closing disclosure document. Generally stays as an additional point of contact for you through-out the process although once the loan application is submitted you’ll probably communicate mostly with the loan processor from there out.
Non-producing vacant land: Vacant land that is not currently producing any income, or is not in an agricultural use that is likely to soon produce income. This would be mostly say recreational property, property you want to buy and hold now and possibly build on later, vacant river land, recreational hunting property or basically any type of vacant land that does not have an income producing agricultural activity on it.
Producing Agricultural Land: Land that has an income producing use, or is on a pathway to producing income. Timber properties, crop land, cattle property, grass/hay, etc. These types of agriculture properties that are generating income can qualify for special USDA agriculture loans. Your lender can tell you more about what may qualify.
Loan Guarantee: When a lender underwrites the loan to specific guidelines and obtains an approval for backing by a government agency, the lender is protecting themselves with a loan guarantee through so that they can be partially reimbursed if the loan defaults. Examples include Fannie Mae, Freddie Mac, Federal Housing Administration (FHA), Department of Veterans Affairs, Department of Agriculture, etc. These loan guarantees allow a lender to offer consumers specialized loan terms that they otherwise would be averse to give because of the risk in doing so. The loan guarantee helps minimize risk to the lenders which in turn allows them to make better loan deals to consumers.
Prime Interest Rate: The “baseline” interest rate that consumer rates are generally based off of. Banks borrow from the Federal Reserve at the “Fed Rate”, the prime rate is a few (generally 3) points above that rate, and then the consumer interest rate can be any number of points (tenths of a percent, .1) or percent (whole percent 1%) more. Generally speaking, government backed and guaranteed loans will have a consumer interest rate closer to prime, or even below potentially for some programs. Other loans are prime + X (X being an amount to be determined by the lender based on the loan type and your particular financial situation).
