Prequalify Property

Prequalifying Your Property for a Mortgage Loan Approval

As mentioned, your mortgage loan prequalification actually revolves around prequalifying four elements:

  • Property
  • Assets
  • Credit
  • Income & Employment

This sub-section provides a quick overview of property issues that are considered during the mortgage loan application and approval process.

Property

There are three key lender requirements regarding properties:

  • Type. Conforming residential loan programs accept only residential properties with four units or less; and all of the units must be residentially zoned and used. . Individual condominium units and townhouses are treated as single-family homes, with some minor twists. If there is a storefront or commercial office in one of the units, such properties are considered mixed-use properties and tend to be treated as commercial properties, which are limited to more-expensive commercial financing. Residential buildings with five or more units tend to be considered commercial apartment buildings.
  • Market value. The lender will conduct an appraisal of the property to determine its current fair market value. If the appraisal value falls short of the purchase price, the buyer will either have to make up the difference or try to renegotiate with the seller to lower the sales price.
  • Condition. Purchase loan programs require the subject residential property to be in acceptable condition. Specifically, it must be habitable and occupiable, with no malfunctions that could affect habitability or value. Buyers looking for “handyman specials” or “fixer-uppers” that need significant rehab before it can be occupied will need to obtain construction loans.

 

Property Down Payment Requirements

Residential mortgage lenders have differing restrictions, depending on the property type.  One of these restrictions is the down payment requirement.

The most important consideration regarding property and down payment requirement is the property’s appraised market value.  The loan is limited to a percentage of the value or price of the property, whichever is lower.  Whatever the loan cannot cover is basically the down payment.  A 90% LTV loan, for example, requires a 10% down payment.

If the property is worth more than the selling price, the buyer is getting a bargain.  However, if the property appraises for less than the sales price, then the buyer must make up the difference or renegotiate.

Thus, with a 90% loan, if the property you are buying has a sales price of $110,000, but is appraised at only $100,000, then the loan will only be $90,000 (90% of the lower value).  The buyer must make up the difference or negotiate with the seller to lower the price.

Single family homes are your basic property type and allow conventional loans up to 95% of the purchase price (5% down), although 10% is preferred.  However, non-conventional FHA loans will allow for up to 96.5% financing (3.5% down).

Conventional guidelines require 20% down payments for 2-unit properties and 25% down payment for 3-4 unit properties.

 


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