If you are looking to complete a purchase transaction for a piece of real estate, you’ll need to make sure that you meet specific requirements, especially if the loan is going to be supported by Fannie Mae.
Fannie Mae, a government-backed company, provides financial support for the American real estate industry, which is generally viewed as an important part of quality-of-life standards. By purchasing loans on the secondary market, Fannie Mae ensures a readily-available supply of money for borrowers.
They create greater confidence for lenders, which means more available money for borrowers. However, Fannie Mae has specific details for loans, and lenders who wish to have their loans purchased by the real estate giant need to make sure their loans fit into specific guidelines.
These guidelines apply to many forms of lending, including purchase transactions for a wide variety of properties…
Requirements for a General Purchase Transaction
A purchase transaction, also called a “purchase money transaction,” is a real estate process where the funding is used to purchase the buying of a property or to both buy and remodel or renovate a property. There are often different eligibility requirements for various loan products, and these differences will be stated in the specific mortgage loan; they should be explained in detail by your lender.
For general purchase transactions, the minimum borrower contribution (down payments) requirements will need to be met. If these contributions are met, the proceeds from the transaction can be used for many different purposes. For example, the borrower can use the funds to finance the acquisition of property or both the acquisition and rehabilitation of the property. The proceeds can also be used to convert a construction loan into permanent financing, or pay off the outstanding balance on installment land contracts.
However, the borrowed money cannot be used to give the borrower cash back unless it is the amount representing reimbursement for overpayment of fees. This settlement must clearly indicate that this matter has been settled through the refund. The money can also be used to give the borrower cash back for a pro-rated real estate tax credit if there has been an error.
If the borrower receives cash back, the lender will need to confirm that the minimum borrower contribution has been met. Reimbursements or refunds may also be applied.
Requirements for a Purchase Transaction with High LTV
In almost all cases, the lender will want to see a low loan-to-value (LTV) ratio. For loans backed by Fannie Mae, the LTV on purchase transactions can exceed 95%, but specific criteria will be applied.
The ratio for high LTV loans will usually be from 95.1% to 97%, and the loan type will be a fixed-rate loan with terms no larger than 30 years. The property can only be a one-unit principle residence; you can’t purchase a duplex or an investment property that you won’t live in. Also, manufactured housing is not permitted for purchase transactions with a high LTV.
To be eligible, the borrower will need to meet specific requirements. At least one borrower listed in the transaction will need to be a first-time borrower, and at least one borrower will need to have a credit score.
The underwriting method is only done by Desktop Underwriter, so no manual underwriting will be used for high LTV transactions. There will also be cash-reserve requirements.
Requirements for a Non-Arm’s Length Transaction
If there is a relationship between the seller and the buyer of the property, the transaction is called a “non-arm’s length transaction.” This relationship can be personal or related to business. While there are different requirements, Fannie Mae does allow for lending on properties that involve these types of relationships. However, they may not be allowed due to certain scenarios; for example, when there is delayed financing.
If the loan is for the purchase of a newly-constructed home, and the borrower has a relationship with the builder, developer, or seller of the property, then Fannie Mae will only allow for purchase transactions on primary residences. They will not purchase mortgage loans on new property secured by a second mortgage or investment properties if the borrower has a previous relationship with the builder, developer, or seller.
Requirements for Purchase of Pre-Foreclosure or Short Sale
There are typically fees and costs associated with the purchase of a pre-foreclosure or short-sale home. While these fees are often the responsibility of the seller, in a purchase transaction backed by Fannie Mae, they become the responsibility of the buyer. These fees can include short-sale processing fees, which are sometimes called “short-sale negotiation fees,” “buyer discount fees,” or “short-sale buyer fees.” The additional costs can also include payment to a lien-holder in order to clean the property of any other financial responsibilities. The borrower may also be required to pay delinquent taxes on the property in order to borrow money to purchase a pre-foreclosure or short-sale home.
To acquire the loan, the borrower will need to provide written documentation of additional fees, including assessments and payments, and the additional funds to complete the transaction. The servicer who is agreeing to the short sale must be given written details on the fees, and they have the option of renegotiating the amount to release the lien.
Everyone involved, including the buyer, seller, and servicer, must provide official agreement of the final details for the transaction, essentially verifying, in legal documents, that everyone agrees to the terms of the purchase. The final settlement statement will need to include all fees and assessments, as well as payments included in the transaction.
Clear Advice for Your Real Estate Purchase Transaction
The real estate purchase process can seem complicated, but when you work with a dedicated, knowledgable team, you’ll get the advice you need to make a clear, confident decision. We’l put our knowledge and dedication to work to increase your chances of mortgage loan approval.
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