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Irregular cash flow factors into industry homebuying

A famous face, a recognizable name — if you’re going to SkyBar, it’s carte blanche. If you’re going to buy a house it’s not. People within the entertainment industry “have to qualify for a loan just like everyone else,” explains business manager Laura Lizer. “The only difference is that they have to do more planning, more research and generally be better prepared than when someone from another field is looking to buy.”

The difference stems from what often is an irregular cash flow. An actor may not work for a year, but still have $3 million in the bank. A freshman screenwriter may earn $30,000 one year, but $150,000 the next. A hotshot special-effects person, pulling in six figures per picture, can work consistently yet still find himself with down time. How do you buy a home under such circumstances?

Save, Save, Save

The key, as Lizer explains, is to start saving and keep saving. She advises clients to set aside a minimum of 10% of their gross income (that’s before taxes) from each pay period as savings. The objective is to amass a healthy down payment. Most lenders require 20% of a home’s purchase price upfront as a down payment. On a $500,000 home, that’s $100,000.

This money can come from savings, equity from other property, or it can be obtained as a gift. However, federal regulations stipulate that the down payment may not be borrowed. While a few lenders manage to find the loopholes to make zero-down loans, that is clearly the exception. And borrowers with a few dings in their credit can safely rule out that luxury.

In spite of the 20% rule of thumb, Lizer recommends putting as much down as is necessary to make for a manageable loan payment. “First determine the monthly loan payment you are comfortable with, plus taxes and insurance. Consider what payments you can afford first, worry about what kind of a house that gets you later,” Lizer says. “Only borrow what you can handle. Don’t get into a situation where, sure you’ve got the great house, but then you’re lying in bed at night worrying about how to make the payments.”

Down time best barometer

Lizer’s concern for “manageable payments” reflects her years attending to the needs of entertainment industry clients. When she says “manageable” she’s not talking about when the earning is easy. “Everyone has good years and years that are only OK. Buy according to the OK years, that way you’re always confident, not feeling like you’re in over your head.” Banks, realtors, brokers, she points out, don’t want to get real estate back through foreclosure, but on the other hand, neither do they look out for the buyer’s best interests.

In today’s sizzling real estate market, such foresight and restraint can be difficult for enthusiastic buyers and well-meaning real estate agents. The news is bursting with tales of multiple offers and homes selling above list price. The frenzy can be torturous for someone methodically, cautiously planning their dive into home ownership. No sooner has the dream house been found, then swish, someone else has closed the deal. Buyers must be prepared to make intelligent decisions very quickly.

Before getting into the thick of home buying, Lizer advises speaking with a handful of loan brokers, agents and bankers. Investigate interest rates and loan packages, and deal with people who specialize in your target neighborhood. “Educate yourself,” she says.

A second priority is to find a lender that can make the deal happen. “When dealing with anybody in this business, the first question you want to ask is how long they’ve been at it,” says Don Richstone of Rodeo Realty Malibu. “Face it, banks and lending institutions are like country clubs. You want someone who’s playing golf with the president on a regular basis. Someone who knows the underwriters, the appraisers, the decision-makers. Someone who can deliver.”

While delivering may be a concern on major loans, Richstone points out that smaller deals are a cake walk. “These days, a lender’s only real concern is that you pay your bills on time,” he says. “With enough down and a good credit rating, the actual level of income is of little importance. The market is unbelievably go-go. It’s very aggressive.”

The bottom line in getting a loan is your credit rating. If your goal is to buy a home, keep that credit rating A+. It will make getting a loan easier, allow for greater loan options and will keep interest rates lower.

Tips, terms & titles

Buy the house you can afford, even if it’s not the house of your dreams. In addition to your credit rating, lenders will want to see two years’ worth of tax returns, 12 months of bank statements and verification that the cash down payment is available.

When trying to get a unique loan package, dealing with less than perfect credit, or are buying an unusual property, dealing with a loan broker is your best bet. They know what lenders are flexible enough to make your deal.

Find a loan broker that will double or triple package your loan application. This absolutely takes greater effort on behalf of the broker. On the other hand, it will give you flexibility and save you from getting caught in an interest rate bait-and-switch. As Richstone says, “It’s very frustrating to find yourself stuck in the middle of the river, but you can’t change your horse.”

Major loans ($1 million-plus) are best handled by a portfolio lender. Deal directly with the banker. An executive decision will be required.

Equity lenders focus their attentions on a property and its equity. Credit lenders focus exclusively on the credit worthiness of the individual.

Adjustable rate mortgages allow a buyer to qualify for the loan with a low “teaser” interest rate. Find out what the actual interest rate will be by the time of the first payment. A rate that started at 3% could jump as high as 7%. Also inquire as to which index the rate is tied. Historically, the 11th District Cost of Funds is the most stable.

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