Do all home buyers purchase PMI (private mortgage insurance)?

What is PMI? Do all buyers need it? 
PMI - Hundred dollar bills, shape of house and words PMI and your mortgage

PMI, or Private Mortgage Insurance, is used when buyers have less than 20% down and are obtaining just one mortgage.

Who needs PMI? Who doesn’t?

Not everyone needs Private Mortgage Insurance.

If you have 20% to put down (your down payment), and it’s a regular or conventional loan, you do not need to pay for this insurance product.

Put another way, if you are obtaining one mortgage and it has a higher than 80% loan to value ratio, such as an 85% or 90% mortgage, you will buy the mortgage insurance.

A 10% or 15% down mortgage with just one loan will require PMI.

A way to avoid paying for this fee is to get an 80% first loan and a smaller second loan. The first loan won’t require the insurance. The second loan will have a higher interest rate, though. The advantage to this approach is that when you pay off the second mortgage, you are done with the higher cost.

On the other hand, if you have Private Mortgage Insurance and you want to be freed from it when your home value rises,  you’ll need to pay for an appraisal and hope that it comes out favorably. It can be a hassle to break loose of it.

If you’re purchasing with FHA backed financing, there’s mortgage insurance built into the product. (It’s government backed, so it’s just MI rather than PMI.)

Who is protected with PMI?

This type of insurance does not protect the consumer. Instead, it protects lenders in case of a default by the borrower.

 

Related reading:

What is mortgage insurance and how does it work? (From the Consumer Financial Protection Bureau)

Seller concession (this site)

 

 

 

What can you learn when you lose out in multiple offers?

Target with keys to a house in the center - What can you learn when you lose out in multiple offers?If you lose out in multiple offers over and over, you’re not alone, but as prices rise, this isn’t a good pattern to be in. What can you learn from it?

Silicon Valley home buyers can have vastly different reasons for getting their offers rejected.

  • For many, the challenge is having a small down payment.
  • Others are very indecisive (and can’t decide fast enough, or cannot really commit enough to write a strong enough offer).
  • Some may have unrealistic expectations.
  • Some pride themselves on “being conservative” and routinely under price their offers.

Below we’ll go over the main issues, what you can learn from losing, and finally, a strategy to pull you out of multiple offers.

Small down payments and the competitive disadvantage

Having a less than 20% down payment may get an offer eliminated off the bat when there are multiple bids. The reasoning has to do with confidence that the bank will fund the loan and not get cold feet. The larger the down, the more secure the loan appears. When there’s more than 20% down available, the buyer appears more able to manage an appraisal shortfall, too.

FHA home buyers have the biggest challenge, for reasons explained previously. Those with 20% down payment have a really reasonable loan situation, but the trouble is that many other competitors do, too.  With rising prices, appraisals are often a problem – and 20% down usually won’t solve it.  So the more cash, the better, and cash is still king.

All cash offers

Having 30% or more will usually overcome appraisal hurdles.  But those ubiquitous “all cash offers”, which comprise about 15% of all Santa Clara County home sales right now, will usually trump any other bid IF the price is attractive.  Don’t be discouraged, though, as sometimes the all cash offers are the lowest offers with multiple bid situations in the San Jose area.

If you lose out in multiple offers for any other reason besides the down payment

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Questions from home buyers before writing an offer

Business woman on the phone - Questions from home buyers - sizing them up Listing agents sometimes receive emails or calls from buyers’ agents with questions from home buyers before writing an offer. (This isn’t usually done by text.) Depending on how it’s handed or worded, this could help the buyers or hurt them.

A few years ago, I wrote an article on this blog about the real estate questions that consumers ask and the relationship between them and the ultimate outcome.  Today we’ll again consider questions, but instead those which are posed to the listing agent by home buyers or their Realtor before an offer is drafted.

One way to think of it is this: when the questions are submitted, the listing agent will be sizing up those buyers and their agents. What kind of impression should a buyer try to make?

Getting noticed in a good way helps: questions from home buyers can be good

In the days or week prior to offer submission, the better Silicon Valley buyer’s agents will make sure that they show up on the listing agent’s radar (surprises are not usually appreciated, so getting a contract out of the blue without a phone call or email prior is a mistake which is likely to make that offer a little less likely to be the winning one if there are multiple bids).

This is a chance to ask some questions and also to let the seller’s agent know that there is progress on the buyers’ side.

Even if there aren’t any questions per se, it’s a good idea for serious buyers to have their real estate agent “check in” and express interest early on. This is helpful in cases where there’s a pre-emptive offer (you might still get a chance) but also with multiple offers since that agent who’s said hello will look more professional and better to work with. It can be a good first impression.

Some agents consider this contact “massaging the relationship” to establish that the buyer’s agent is knowledgeable, professional, pleasant, and would behave well in escrow.

There are many questions to ask when buying a house, but many of them will be answered by reviewing the disclosure package, so proceed carefully and try to avoid asking questions that are answered in the package.

Good questions from home buyers before writing an offer

Helpful questions from home buyers include these:
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What is a blind real estate offer?

Circle with slash and words Blind offers

A blind real estate offer is a purchase contract which is written by a buyer when the property is sight unseen. There are commercial properties, such as apartment buildings, in which this is the norm, and it’s not surprising for multi-family units such as duplex to fourplex properties. It is uncommon with single units or homes.

Right now we are in the midst of a Shelter In Place order due to the coronavirus pandemic. Current restrictions do not permit the showing of homes, inspections, or appraisals – though the latter two may change or get adjusted somewhat as this order persists. If you want or even need to find a property, how can you do it with this restriction? It is not advisable, but some would-be home owners are writing blind real estate offers.

It makes sense for a multi-unit property to be sold this way because the investor cares most about the numbers. How’s the cash flow? Are the reserves good enough? When will the driveway need repaving? All of these items address the question of whether or not it’s a good investment, a good business decision.

Blind real estate offer on your own future home

Buying a home that you are going to live in needs to make sense financially, but you also need to like it. You need to see if the home has enough light, if the rooms feel crowded or spacious. You must learn if there are floors out of level or odors or other issues undetectable from a virtual tour or series of photos.

Before the broad Shelter In Place order, I showed a home in Gilroy, and one of my clients had an allergic reaction in the house. Maybe it was the new carpet? Who knows – but it was imperative that we visit the property in person.

Blind real estate offers are dangerous since they curtail the buyer’s ability to have properly vetted the property. They are also dangerous for the seller, who can get the house tied up with a buyer who may or may not be willing to go through with the sale once the home is finally seen in person. If the Shelter In Place order continues for 2 or 3 months, which Governor Newsom suggested yesterday, it’s possible that access by appraisers or real estate agents may not be permitted for a long time. Long escrows carry their own risks.

For all of these reasons, I do not suggest that homes be bought and sold  “subject to inspection“. (more…)

Silicon Valley real estate: the importance of confidence in the most successful home buying and selling

ConfidenceConfidence is perhaps the most under-appreciated factor in Silicon Valley home buyers and home sellers in getting more of what they want, or being successful at all.

Home buyers who feel confident about the market generally may buy, but when they have a lack of confidence that properties are holding their value, they don’t – even though a “buyer’s market” is often a great time to purchase real estate!

Silicon Valley home buyers who are confident about a particular property are more likely to pay more and to go into the bidding process with fewer contingencies and shorter contingencies, if any at all.  When they lack confidence in a property, the seller’s truthfulness, the listing agent’s professionalism, in the neighborhood or in the real estate market itself, they either don’t bid or they bid low.

Home sellers who feel confident about a buyer and that buyer’s financial abilities are more likely to choose him or her over others.  They want to feel that the buyer can perform, that the sale will close and there will be no “re-negotiation” are more likely to accept that offer than one which is riskier.  Sellers know that when a home falls out of contract, it often sells for less the 2nd time – so they do not want the sale to fall apart.  For that reason, most of them now want offers which are without any contingencies (or perhaps very short ones).

They also want the most money possible, of course, but if it’s neck and neck between the higher price with worse terms or slightly lower price with stronger terms, they will either counter the lower price up a little or they will outright accept the offer with more security of closing.

Often with multiiple offers, there will be a solid “band of pricing” where most home buyers seem to think the value lies.  Then there will be one or two who are higher.  Maybe one will “spike” the price.  But if the spiked price comes with an appraisal contingency, it is really a mirage, an illusion, since the price will likely be renegotiated later.   When listing agents see that kind of spread in prices offered, most of the time they’ll try to get the people with the best terms to move up in price.  It may not go all the way to the spiked price which is laiden with contingencies, but it will probably move in that direction.

What can San Jose area buyers and sellers do to improve their odds of success?  I would say the number one thing is to improve the sense of confidence on the other side of the bargaining table.

What can Silicon Valley home sellers to do enable buyers to feel confident (and to pay top dollar)?

Home sellers can increase the confidence levels of buyers by doing the following: (more…)

Can you hear me now? The importance of discretion in real estate transactions.

Old IntercomDiscretion is not a trait that we Americans are well known for, but with real estate transactions, whether buying or selling (or more obviously, working in the business), it is keenly important.

Home buyers want to exercise caution about expressing much when viewing homes in the presence anyone other than their own party or their own Realtor.  Many intuitively know to say very little in front of the seller, the listing agent, or other buyers or other agents at an open house except for their own.  Since many of our Silicon Valley residents originally hail from another country, the temptation can be to switch modes and converse in their native language.  But that, too, may not always give the confidentiality you’d hope for, as many people here speak two or more languages, and you might be surprised to find out who speaks which one(s).

My blonde haired, blue eyed younger sister is fluent in Spanish after studying at the language institute at Cochabamba, Bolivia and later living in Venezuela for several years.  She tells a very funny story about later studying and living in New York and hearing, loud and clear, some young men say rude things in Spanish, mistakenly assuming that she didn’t understand a word of it.  Apparently, her Irish got the better of her, and she told them off using Spanish that would make a sailor blush.  I bet they didn’t make that assumption about language capabilities after that!

Home sellers will want to be discreet also.   They are usually best served when they are absent during showings – it heads off all kinds of problems at the pass.  Their listing agent should be present during conversations with potential buyers or buyers’ agents to keep that seller from saying something that might be harmful to his or her negotiating position later. (And in fact the buyers’ agent is not supposed to ask the seller any questions unless the listing agent is also there – that’s part of our Realtor code of ethics.)   (more…)

Client control: what it is, and why it benefits everyone involved

Client control“Client control” is a strange sounding phrase. It almost seems manipulative! But that is very far from the truth.  It’s something helpful which benefits buyers, sellers and real estate agents. What is it, then?

Essentially, client control refers to home buyers and sellers behaving themselves.  Most of the time, Silicon Valley real estate consumers have a fairly good idea of what is appropriate behavior (what is expected of them and of the other party) when buying, selling, or getting through the ‘sale pending’ period.  When they don’t, their Realtor or salesperson should be providing some guidance (communicating, teaching, coaching) on what to do or not to do, and what are appropriate expectations.  When expectations are incorrect, unhappiness ensues.  It is all about expectations!

Anyone familiar with children can see the parallel with raising kids. Children who do not understand boundaries end up being miserable, and they take everyone else around them into their misery.  It’s the same with “out of control” clients.  Most Realtors try to ascertain upfront whether or not it will be possible to have a good working relationship with potential buyers or sellers between them and also in escrow.  Are they honest? Polite? Considerate? Reasonable? Teachable or coach-able? And perhaps other criteria as well. If not, it won’t be worth it to try to represent them in a transaction. It would be a giant headache.

This is true in other professions too.  I’ve known doctors and lawyers (including my dad, when he was practicing law in San Jose) to fire their patients and clients at times.  Recently I saw an article written by an attorney on this same topic. Brian Tannebaum wrote a post entitled  The Practice: Client Control, Before It’s Out Of Control  and wisely stated “I believe in the philosophy that sometimes the best client is the one you turn down”.  This is exactly the same in realty. (more…)

Real Estate Purchase Contract: Better to Pick a Close of Escrow Date or Number of Days to Closing From Acceptance?

Closing date or number of days to closing?Silicon Valley home buyers (and sellers) are faced with a myriad of questions and choices when completing or reviewing residential real estate contracts to purchase the property.  One of them, early on, is whether or not a particular day is chosen for closing escrow or if instead it’s a number of days from contract formation (acceptance) to closing.

Which is better?

The are pros and cons to each approach, of course.  Many buyers want to be able to plan, without any ambiguity, when they will move in to their new home.  (For some this can be a matter of feng shui, astrology or a sense that some days are more fortuitous than others.)  This can work if negotiations are not protracted.

With distressed sales, though – bank owned properties (REOs) and short sales – and sometimes with multiple offers, the negotiations time frame can be hard to predict and if you pick one particular date, you may well have to change it later or find that you don’t really have enough time because a week or more gotten “eaten up” with counter offers, waiting for a bank or seller to respond or other delays. In those cases you may want to have the flexibility of writing in the length of escrow (number of days) rather than picking a certain date.

As always, talk with your professional real estate licensee for guidance as each case may be different.