Should I sell my house or rent it out?

By Craig Strent, Chief Executive Officer

I can’t begin to tell you how frequently potential home buyers, particularly first time buyers, tell me that they intend to rent out their home when they decide to move.  And while that may seem like a good idea, I find that buyers rarely know what tax benefits they may be missing out on when they do that.  With that in mind, here are some things to consider when deciding whether to rent your home out or to sell it:

Benefits of renting your home out: 

1. You may have a stream of additional monthly income by renting it out for more than you pay on your mortgage and condo or homeowners association fees if applicable 
2. Build additional equity that you can then cash out of later if the home appreciates over the long term
3. Rental income can be used to help supplement your retirement income and eventually you may pay the mortgage off (though that is not necessarily a great idea)
4. Passing the property along to your heirs at a future date, they would likely receive a “stepped up basis” on the property, which will allow them to sell it if they wish without much tax liability
5. You can tell your friends that you are a Real Estate Mogul

Negatives of renting your home out:

1. Second job–being a landlord can be like having a second job. You will field calls from your tenants regularly and have to coordinate repairs to the property. You may also deal with other issues like advertising and showing the home.  You can of course hire a management company to do this for you, but many charge as much as much as 30% of the rent, which will quickly eat into your profits
2. Capital expenditures – at the very least you will need to paint and carpet whenever the property turns over, but larger repairs to the HVAC, roof, appliances, and other things can rapidly wipe out your profits
3. Vacancy – when lenders calculate income from a rental property, they use a “vacancy factor” as it’s unreasonable to think that a property will always be occupied.  Count on some months where you are looking for new tenants or at least fixing up between tenants where you will not receive your regular rental income   

Tax Implication of Selling vs Renting:
This is a BIG one!  It’s very difficult in this country to receive large amounts of money TAX FREE, but the sale of your primary residence is one of them!  It’s called the 2/5 rule and here’s how it works: When you sell your home, you look back 5 years and if you have occupied the home as your primary residence for 2 of the last 5 years, then you can exempt up to $ 250k (single filer) or $ 500k (married filing jointly) when you sell your home.  Click here to learn more about the capital gains exclusion and how it works.  

Trying to decide whether or not you should rent your home out or sell? Be sure to check out the second blog in this series out next week.

Want to talk it out? Contact me at 301-610-5480 for a discussion and analysis specific to your situation.

Feel free to check out our mortgage calculators, request a copy of our homebuyers guide or get started on your mortgage application.

VA Loans Part 2: Basic Requirements

By Brian Willingham, Senior Mortgage Banker

Last week we discussed the basics and benefits of a VA home loan and I promised to come back this week to discuss the qualifications and basic requirements of VA loans.  

Who qualifies for a VA loan?

In general, active duty members or veterans of the United States Armed Forces, and some government agencies, are eligible for VA home loans provided they have met some minimum service times and did not receive a dishonorable discharge from service.  The minimum time required to qualify for a VA loan depends on when you served. Click here for the full list.   

For members of the National Guard or Reservists, a minimum of six years of service in the Guard/Reserves is required.  However, periods of active duty service during wartime or peacetime could qualify a member of the National Guard or Reserves with less than six years of service.    

How do I know if I qualify?

The first step in obtaining qualification for a VA Home Loan is to obtain a Certificate of Eligibility (CoE).  The easiest way to do so is through contacting a mortgage lender and have them request the certification for you through the VA’s lender website.  Your mortgage lender will need some basic information from you and can then obtain your CoE instantly.  In some cases, the CoE is not available online and your lender will have to submit documentation to the VA in order to establish your eligibility.  Typically, a copy of your DD214 is required (or a statement of retirement points for a reservist).   You can also request them yourself through the VA’s website here: https://www.ebenefits.va.gov/ebenefits-portal/ebenefits.portal. 

What are some of the common qualifying rules for VA?

VA Home Loan guidelines are similar in many respects to standard mortgage rules.  Although the VA itself doesn’t have a minimum credit score requirement, most lenders establish their own minimum requirements. As I mentioned in my first blog, most VA loans don't require a down payment. However, you may need to document that you have enough cash to pay the closing costs associated with buying a home. Oftentimes, you can negotiate for your closing costs to be covered in part or in full by the seller, or receive a credit from your lender. VA loans don't require that you have reserves (assets left over after paying closing costs) unless you own another property.

VA loans do have some unique rules when it comes to debt and income.  All types of mortgages have limits to the amount of debt payments, including the proposed mortgage payment, that you can have when compared to your income (debt-to-income ratios or DTIs).  VA takes this a step further and requires what is called a “residual” income calculation, which factors in debts and income along with other factors, such as the size of the house you are buying and the number of children you have.   Unlike other types of mortgages, VA takes the cost of childcare into consideration.  The rules on these calculations are complicated and outside the scope of this post, but you should consult with your lender on these issues before beginning your home search.   In most cases, despite the additional qualification rules, using a VA loan will allow you to qualify for as much or more than other loan programs due to the lower payments and more flexible approval guidelines for debt-to-income ratios. 

 

Everyone’s situation is different, so check with your lender at the onset of the process for specifics on your personal situation. If you have any further questions, feel free to contact me and I’m happy to help! Feel free to check out our mortgage calculators, request a copy of our homebuyers guide or get started on your mortgage application.

About Brian:
Brian Willingham in a Senior Mortgage Banker with Apex Home Loans and served in the United States Marine Corps from 1993 to 1997.

The Basics & Benefits of VA Home Loans

By Brian Willingham, Senior Mortgage Banker

For veterans who qualify, a VA home loan is usually the best option to finance the purchase of a home.   In this blog, I’ll quickly go over the benefits of a VA loan compared to other types of mortgages.

What are the benefits of a VA Home Loan?

VA loans offer several benefits compared to other mortgage programs available:

• In most cases, no down payment is required (see below for more information)
• In addition to not having a down payment, there is also no mortgage insurance on VA loans
• VA loans often provide better interest rates than conventional loans

VA Home Loans do not require a down payment if the veteran has not previously used their home loan benefits and the price of the home is within established VA limits. These limits are based on the state and county where the home is located. You can find those limits here:  http://www.benefits.va.gov/HOMELOANS/purchaseco_loan_limits.asp

For veterans who have used their home loan benefits before, no down payment could still be an option but this is dependent on other factors.  Other than VA loans, there are very few mortgage options with no down payment.  Keep in mind, conventional loans require at least 5% of the sales price for a down payment, and FHA loans require 3.5% down.  Although, some counties and states have first-time home buyer programs that provide assistance for the down payments and closing costs required by conventional or FHA loans, they typically don’t provide the low interest rates that a VA loan does and most usually have mortgage insurance requirements as well.

 

Mortgage insurance is an extra fee paid by the home buyer on loans with less than 20% down which provides additional protection for the lender in the case of a default on the loan.  Mortgage insurance rates vary depending on loan types, credit scores and other factors, but regardless, they raise the cost of buying a home.  Since VA loans don’t have mortgage insurance like other types of loans, this provides an additional opportunity to save money. 

VA loans do have a “Funding Fee” which is paid to the Veterans Administration at the time of settlement.  The amount of the funding fee varies depending on if the veteran has used their VA Home Loan benefits before and if there was any down payment requirement.  However, even with the funding fee, VA loans can often save veterans money compared to conventional and FHA loans because of their often lower rates and lack of down payment requirement and mortgage insurance. 

Next week, we’ll take a look at the basic requirements and some of the more common rules with VA loans. Until then, feel free to check out our mortgage calculators, request a copy of our homebuyers guide or get started on your mortgage application. 

How is my credit score determined?

By Amy Smith, Mortgage Planner

 

Credit scores are driving forces for nearly everything these days.  A low credit score may mean having to put a deposit down when opening utilities or not being able to obtain new credit for an auto loan, credit cards or a new home.  With a low credit score you can also count on higher rates on any new financing.  Here’s a breakdown of how your credit score is derived:

1. Payment History – 35% Impact – Paying debt on time and in full are positive marks on your credit report.  Late payments, collections and judgments all have a negative impact on your credit score.
2. Outstanding Credit Card Balances – 30% Impact – A high outstanding balance compared to the available credit can have a big impact on your score, especially if multiple accounts have balances that exceed 50% of the available credit.
3.   Credit History – 15% Impact – The longer you have credit the better your score. 
4. Type of Credit – 10% Impact – A mix of loans (auto, student, credit)  is always better than having a high concentration of one type of loan, especially credit cards
5. Inquiries – 10% Impact – This is based on how many people have pulled your credit in the last 12 months.  If you pull your own credit there is not an impact to your score.

There are quite a number of credit sites that will monitor your credit scores/report for you.  You can also access a free credit report from each bureau through www.annualcreditreport.com once a year.  For a more information on the points above you can click here. Feel free to also visit us online to try our mortgage calculators, request a copy of our insider's guide to credit scoring and home financing, request a copy of our  homebuyers guide or get started on your mortgage application!