Financing Issues in Buying a Property

1.    Buyer qualifications

2.    Buyer needs

3.    Property classification

4.    Location of Property

5.    Type of lender used

6.    Type of loan required/desired

7.    Appraisal issues

As you begin to think about placing an offer on a potential property, the fact of financing comes up. How will you ultimately pay for your purchase? Do you have the available cash for the down payment, closing costs and the inspections and appraisals? Do you want to use all cash for your purchase? Can you re-finance an existing property to pay for your new purchase? Do you need to get a loan? What kinds of loans are out there? Which loan will fit your needs best? Where do I start and which option is best for me?

Choosing a Lender

These are just a few of the questions you may ask during the lending process. There are just as many when it comes to choosing who your lender will be and many things to consider while making your choice. To start with, it is often a great idea to get some referrals from your Realtor and then discuss your needs with at least three lenders to get an idea of which one may have the best deal for you.

I often recommend my clients look at a variety of lenders and banks depending upon their situation and the property they are looking at. Some banks are simply a better fit for one property over another. Banks lend differently on a standard “stick built” home versus a modular or manufactured home. Improved lots are a bit harder to lend on and many banks will not lend on them unless a construction loan is being sought after. Raw land (meaning no utilities stubbed to it) is very difficult, if not impossible to lend on. In the cases where the property is going to have a difficult time with a conventional loan, I often recommend to the seller, as well as the buyer, to consider seller financing. Seller financing can be a very streamlined loan and can be very beneficial to both parties if the terms are good.

Why Location Matters for Lending

In addition to the  “type” of property you are looking at, we need to look at location as well. Some locations are simply easier to lend on over others. The lending process requires an appraisal. An appraisal is an opinion of value for the day written by a trained professional appraiser. The appraiser has very rigid guidelines he/she has to follow while putting the appraisal together. We will go into a little more depth on the appraisal process in a separate section. For now we will just concentrate on how the location can affect the appraisal process.

Niche Markets

One of my areas of expertise is the Springdale, Utah, market. Springdale is a very unique market. It is highly desire-able and only has a handful of properties available. As we know from economics, demand and supply drive pricing. High demand, low supply drives pricing up. The appraisers goal is to find at least three similar sales in the past 6 months to a year. In a small niche market like Springdale, that is often very difficult. The appraiser is left with possibly three sales in the past year but the sales are not similar. The appraiser then has to do a lot of justifying dialog in his/her appraisal. I have seen banks outright reject the appraisal and deny the loan because they don’t want to base their loan off of an appraisal that is too far from “standard”. In these cases I often recommend talking with a local bank instead of a large national chain bank or a loan broker. Local banks and credit unions will know the niche market and understand the difficulties of the appraisal process there.

So far we know we have to consider:

a.    Buyers qualifications, abilities and personal needs in choosing a lender and a loan.

b.    Type or classification of property we are trying to purchase.

c.    Location of the property in terms of available comparisons.

We also need to consider the lender we use. Does our lender work for a national or statewide bank? A local bank or credit union? Or is our lender a loan broker? Is our lender licensed to do business in the area of the property? Is our lender qualified? Can we work well with our lender?

Interview your Lender

All good questions to consider. Beyond these questions we should interview our lender to see if he/she can work well with us throughout the buying process. You want to have a lender who can help guide you with the dates in your contract and actually help you meet those dates. Can your lender help you get the right loan for your needs? Good interest rates? Discount points? Closing costs for the loan? All of these questions should be considered when shopping for a loan.

If you have a CPA or a tax accountant it would also be wise to discuss your lending options with this person as well. They are getting paid to help you use your money wisely and they can be an invaluable part of your purchasing process.

Next week… we will ponder a bit more on differences in lending institutions and types of loans to look at.