Financing Beach Homes
The mortgage process has undergone some changes over the past few years and if you haven’t been through it recently there are some things you should be aware of. While the banks are eager to lend money (this is after all how they make a profit) they are performing considerably more due diligence, ensuring every “i” is dotted and every “t” is crossed. Additionally, there are a couple of additional steps when you are purchasing property “at the beach” that you need to ensure you and your agent are familiar with. Below you will find an overview of the process and additional steps as they pertain to the purchase of real estate in Ocean City MD and the surrounding areas.
The first step as you consider purchasing real estate in Ocean City MD and the surrounding areas is to get pre-approved by a local lender. This is a simple process that will ensure your potential purchase fits into your overall financial strategy. Additionally, most Sellers will not formally respond to an offer contingent on financing without a pre-approval letter being submitted with the contract. A strong pre-approval letter can also provide additional strength and leverage when negotiating a deal, especially if there are competing offers.
Once you find a property you are interested in and have an accepted offer we will initiate the loan process with your financial institution of choice. They will start the process by gathering all of the required information from you, pulling credit reports and submitting a formal loan application. The initial documentation required by most lenders is listed below:
- Past 2 Years Tax Returns
- Most Recent 2 Years W-2 Statements
- Pay Stubs for Most Recent 30 Day Period
- 2 Months Most Recent Bank Statements
- 2 Months Most Recent Retirement Accounts (if applicable)
- Most Recent Mortgage Statement for Primary Residence (if applicable)
In addition to the items above self-employed individuals will need to provide
- 2 Years Most Recent Business Returns with K-1 Schedules
- Unaudited Profit and Loss Statement for Current Business Year
While you are working with the lender through the documentation phase the property appraisal will be ordered and completed. Since we will have looked at all of the recent comparable property data prior to you making an offer on the property we typically do not have any issues with the appraisal. If we are dealing with a unique property some challenges may arise that I will deal with and address at your direction, most of which are easy to overcome.
Title Work and Deed Preparation
The settlement company that you choose to conduct the closing will perform the title search and preparation of the deeds for the property transfer. They will have a lot of the information that your lender needs and as a result will be in constant communication with them throughout the loan process. Additionally, I will be following up with both parties on a regular basis to ensure they have all of the information they need and that everything is progressing as it should.
Home Owners Association Review
This is the biggest change in the mortgage process that we have seen over the past few years. In the good old days the lender was only concerned with approving you for the loan and quite frankly didn’t care where the property you were buying was. Now if you are buying a condo or town home that is part of a homeowners association the association must be reviewed and approved by the lender. This is something that local lenders and I deal with every day and really is not a big deal, but it is something that you should be aware of. The lenders have a questionnaire that they will send to the communities management company to be completed. Additionally they will review all of the associations financial statements, operating budget and insurance to ensure that it meets their criteria for approval. Red flags for lenders are items such as inadequate reserves, "condo-tels", the presence of time shares, insufficient insurance coverage, majority ownership and others. Once all of the documents are gathered and the questionnaire is completed they will be submitted to the lenders underwriters for review. Most of the buildings in Ocean City are what the lenders deem “warrantable” and we typically don’t have any problems during this phase. I am familiar with a majority of the buildings in town that have issues and will make you aware of these properties prior to us looking at them.
The lender will have property insurance requirements that you will have to have in place to protect the property. If you are buying a condo or town home a majority of your required property insurance will be covered in the condo fee and I will provide the lender with the proper documentation outlining the coverage. In this situation the only insurance you will need to obtain is an HO6 policy, otherwise known as contents insurance to cover your personal property, furnishings and property improvements. If your buying a single family home or a property that is not part of an association you will need to obtain your standard home owners insurance, as well as flood insurance in a lot of instances. It is best to contact the insurance company that holds the policy on your primary home first as this is usually the least expensive option. In the event that they won’t provide coverage (don’t be surprised if they won’t as many insurance companies will not insure properties in coastal areas) I will provide you with contact information for several local companies that specialize in coastal insurance. We will get this process started once we have a ratified contract and the loan application has been submitted so that you have plenty of time to find the best options and rates.
Once all of the aforementioned items have been completed they will be packaged together and sent to the lender’s underwriters for final approval. In most instances the underwriters will issue a conditional approval, requiring some minor additional documentation. Usually these are items just to bring things current such as the recent pay stubs, bank statements, etc. Once any required conditional items are provided the lender will issue the final commitment letter and we will be ready to go to settlement.
For single family homes and properties that are not part of condo association this process typically takes 30 days. For properties that are part of an association the lenders typically request 45 days to get the loan completed. We can turn both of these around in as little as 2 weeks if necessary but everyone needs to be on top of their game! Once the loan is approved and you are ready to go to settlement the title company you have selected will conduct the actual closing. The lender will send the loan package to the title company and they will go through this and all of the other related closing documents with you and the seller. Once everything is signed they will disburse all of the funds and you are the lucky new owner of a "place at the beach".
As you can see the process is largely the same with the exception of a few additional steps and a bit more scrutiny. For the clients I represent I stay in touch and work with the lender throughout the entire process. You essentially provide them with your financial documents and I will take care of everything else. Due to some of the unique nuances that getting a loan for a second home beach property presents I highly recommend working with an experienced local lender. While I am willing to work with any lender to get the deal done, your life will be much easier by working with a lender that handles these types of loans on a daily basis.
If you would like to discuss this article in greater detail or anything else pertaining to real estate in Ocean City MD and the surrounding areas feel free to contact me directly anytime at 443-614-9179 or by email below.
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