VA Financing FAQs

Can I do Nomad with a bankruptcy?

Often times, the reason why someone may find themselves in the Catch Up Nomad position is because of some financial setback that happened in the past. Many times this results in a Catch Up Nomad in having a past bankruptcy.

So, the next logical question is: can someone do the Nomad model if they’ve had a past bankruptcy?

The answer is: yes, you can do the Nomad model if you’ve previously had a bankruptcy.

Loan programs vary over time such that loan programs that are available today might not be available tomorrow and loans programs that don’t exist today may be available tomorrow.

With that being said, there are loan programs, like FHA, where you can get a loan 2 years after your Chapter 7 bankruptcy has been discharged. You can get an FHA loan with 1 year of on-time payments during a Chapter 13 bankruptcy with the approval of the bankruptcy court. It is my understanding that these same rules also apply to VA loans.

For USDA loans, you’ll need to wait three years from the date of discharge of your Chapter 7. However, you can get a USDA loan with just 12 months of on-time payments on your payment plan for a Chapter 13 bankruptcy. You can also get a USDA loan a year after the Chapter 13 has been discharged.

So, you’ll be able to get your first Nomad property relatively easily after bankruptcy (your first two if you and your spouse are alternating loans). What about additional properties?

The typical loan that we recommend for Nomad is conventional financing and they happen to be a bit longer wait after a bankruptcy. How long? 4 years after a Chapter 7 discharge to be able to qualify for a loan or 2 years after a Chapter 13 discharge. If your Chapter 13 was dismissed without a discharge, you’ll need to wait 4 years from the date of the dismissal.

Now… I’ve also heard, from time to time, of special bankruptcy friendly loan programs with higher interest rates. In the right situation, I’d probably be OK with these as well.

USDA Financing FAQs

Can I do Nomad with a bankruptcy?

Often times, the reason why someone may find themselves in the Catch Up Nomad position is because of some financial setback that happened in the past. Many times this results in a Catch Up Nomad in having a past bankruptcy.

So, the next logical question is: can someone do the Nomad model if they’ve had a past bankruptcy?

The answer is: yes, you can do the Nomad model if you’ve previously had a bankruptcy.

Loan programs vary over time such that loan programs that are available today might not be available tomorrow and loans programs that don’t exist today may be available tomorrow.

With that being said, there are loan programs, like FHA, where you can get a loan 2 years after your Chapter 7 bankruptcy has been discharged. You can get an FHA loan with 1 year of on-time payments during a Chapter 13 bankruptcy with the approval of the bankruptcy court. It is my understanding that these same rules also apply to VA loans.

For USDA loans, you’ll need to wait three years from the date of discharge of your Chapter 7. However, you can get a USDA loan with just 12 months of on-time payments on your payment plan for a Chapter 13 bankruptcy. You can also get a USDA loan a year after the Chapter 13 has been discharged.

So, you’ll be able to get your first Nomad property relatively easily after bankruptcy (your first two if you and your spouse are alternating loans). What about additional properties?

The typical loan that we recommend for Nomad is conventional financing and they happen to be a bit longer wait after a bankruptcy. How long? 4 years after a Chapter 7 discharge to be able to qualify for a loan or 2 years after a Chapter 13 discharge. If your Chapter 13 was dismissed without a discharge, you’ll need to wait 4 years from the date of the dismissal.

Now… I’ve also heard, from time to time, of special bankruptcy friendly loan programs with higher interest rates. In the right situation, I’d probably be OK with these as well.

Student Loan FAQs

Can I get an FHA loan if I have student loans?

If you’re considering doing the Nomad model and you already have student loan debt you can still get an FHA loan.

It used to be the if you did not have repayment information for a student loan then lenders would need to estimate your payment on student loans for FHA financing to be 2% of the loan balance per month. Ouch! In mid 2016, FHA changed their policy to be the same as what Fannie/Freddie use which is 1% of the loan balance.

So, if you had $50,000 in student loan debt, it used to be that with FHA you’d have to budget $1,000 per month for payments on that student loan (that’s 2%). With the new guidelines, that is reduced to $500 per month.

This helps improve your debt to income ratio making it easier to qualify for FHA loans.

Short Sale FAQs

Should I buy short sales?

A short sale is where the lender is willing to accept less than what is owed on the loan to allow a sale of the property to occur. In most transactions, the loan to the lender must be paid off for the sale to occur. So, when you’re doing Nomad should you consider buying a short sale? My advice… don’t focus on them.

If while looking for a Nomad property you happen to come across one that is a short sale and it would be a good Nomad property, then I would not automatically discourage you buying it just because it is a short sale.

However, I would definitely not encourage you to specifically seek out short sales to buy.

In fact, in our local market in Northern Colorado… the number of shorts sales is currently almost non-existent. So, we do not focus on buying them at all.

I would encourage you to rely on the advice of your local real estate agent on a case-by-case basis when considering buying a short sale as a Nomad property.

One additional important note on short sales… they can take a lot longer to close than traditional transactions as you wait to get approval from the lender to accept the short sale. That can make it very difficult to put a tenant if your previous property and purchase the short sale. So, definitely take that into consideration as well.

Can I do Nomad with a short sale?

It is not unusual for a Catch Up Nomad to find themselves as a Catch Up Nomad partially because they’ve had some financial challenges in the past. These challenges often involve a short sale where they sold a property and had the bank accept less than what was owed as payment to have the sale go through.

So, once you have a short sale, does that mean you can’t do Nomad anymore? No, you can still do Nomad even if you’ve had a short sale in the past.

There are a couple variables on how long you’ll need to wait to be able to get a new FHA loan after you’ve had a short sale. In some cases, you may not need to wait at all.

For example, if you were not in default at the time you filed for a short sale and you had been current with all on-time payments for mortgages and other installment debt for at least 12 months leading up to the short sale… then there is no waiting period at all and you can get an FHA immediately.

On the other hand, if you were in default (behind on payments) there may be a three year waiting period for getting an FHA loan. The 3 year waiting period begins on the date of the short sale or if it was an FHA-insured loan then it becomes the date FHA paid the claim on the short sale.

There are some additional exceptions to the three year waiting period if you can show extenuating circumstances that caused the default. For example, if there was a serious illness or death in the family of the primary income earner, a divorce in very limited situations or job loss.

I think it goes without saying that you need to show you had good credit prior to the short sale and have good credit now. You’ll need to qualify for the new loan.

The waiting period for conventional financing after a short varies with the amount of down payment. So, to get additional Nomad properties with minimal amounts down, you’ll likely need to wait up to 7 years. If you’re willing to put more down, the time frame you need to wait shortens considerably down to 2 years if you’re willing to put 20% down.

In a future article, I’ll need to write out a modified Nomad model for those with short sales, bankruptcies or foreclosures but there are some creative things we can do that will still follow the lender guidelines.

REO FAQs

Should I buy REOs?

REOs or Real Estate Owned by the bank or the lender are usually properties where the bank has foreclosed on them. So, should you consider buying these REO properties when doing the Nomad model?

My opinion is that if they would otherwise make a great Nomad property I would not rule them out. If you happen to find a great REO and you want to buy it, move in, live there for a year then convert it to a rental… that’s fine and approved by me.

However… I would strongly warn you… especially if you happen to be in a real estate market as hot as ours… that you do not wait around and focus on finding an REO to buy. The raw, very small number of REO properties available for sale will limit the number of properties you have to choose from and I’d rather see you buy a property that would be an ideal Nomad property. Do not wait for an REO specifically.

You may also want to read more about my thoughts on whether you want to focus on buying at a discount when doing Nomad. That is why I think many buyers want to look at REOs, short sales and foreclosures to begin with. I’ll give you the short version of my opinion on buying at a discount: it is not required, but can help the Nomad model in certain specific situations.

Rent FAQs

Can I use the rental income from Nomad houses to qualify for me next Nomad home?

Yes! If you’ve got positive cash flow from previous Nomad houses that you’ve purchased you can use that extra cash flow as income to help qualify you for your next Nomad purchase.

Many (although not all) lenders will allow you to use a signed lease as income that can be used to offset the loan expenses on loans. There are restrictions and limitations to this like whether or not you have landlording experience that may come into consideration with the loan underwriter. Check with your lender early about this.

However, it is important to point out that the opposite is also true… if you have negative cash flow on a property, it will not help you qualify for the next purchase. Having negative cash flow will hurt your ability to purchase the next property.

Some Nomads have more than enough income to qualify even with this negative cash flow or without using a lease from the property you’re moving out of, but some do not.

You can talk to your lender to get a much better idea on how this applies to your specific situation or, as a quick and easy way to get a rough idea that is not specific to you, you can also plug some numbers into the Nomad Calculator Classic and look at the income required… that does take into account rent from the previous Nomad properties.

Interest Rate FAQs

How do I find out my interest rate?

If you’re thinking about buying a property or even thinking about using the Nomad Calculator Classic to model doing Nomad you should find out what your interest rate might be. You would find out your interest rate by calling up a lender that you’re considering getting a loan with and asking them what your interest rate would be for the specific loan type you plan to get with your estimated down payment amount.

Can I lock my interest rate?

Yes… you usually can lock in your interest rate for a short period of it.

The amount of time that you can lock in your interest rate for varies quite a bit depending on the lender and their programs. I’ve seen a lot of lenders allow you to have a 30 day or 60 day interest rate lock. This is helpful when we think that interest rates might rise on your while you’re actively out looking to buy a home. I hear recently about a lender that allows you to lock a loan interest rate for up to a year. I had not heard about that before.

Can I lock my interest rate now for my next Nomad purchase next year?

While it is possible to lock your interest rate now for your Nomad purchase a year from now, it might not cost effective to do so. When you lock an interest rate, you can often lock an interest rate at no cost for a short period of time. If you want a longer lock period, you can often pay more to lock it at that same interest rate or accept a slightly higher interest rate and lock that for no cost.

To lock an interest rate for an entire year out will cost you quite a bit or you’d be locking a much higher interest rate. So, while it is possible to lock in your interest rate now for your next Nomad purchase a year from now, it may not make sense to do so.

What is too high for an interest rate?

The Nomad model works with any interest rate. It can be much harder for you to make the properties have positive cash flow as your interest rates go up, but we have some solutions for improving cash flow and dealing with negative cash flow that we talk about in detail in presentations on elsewhere on this website.

Interest rates on mortgages have varied quite a bit over time. Here is a chart showing historical interest rates on 30 year fixed rate mortgages going back to 1970 through 2015.

historical-interest-rates-from-1971-to-2013

Interest rates peaked out at over 18% in the early 1980s, but just eye balling an estimate, it seems like interest rates have probably averaged in the 7% range for most of that time. As I write this, interest rates are hovering near all time lows.

If we look at a chart showing historical long term interest rates (not specifically interest rates of 30 year mortgages) published in an article by the NY Times you can see that the lead up and decline from the peak in the 1980s was the exception and not the rule. Going back to the early 1800s we can see that normal for long term interest rates seems to be below 5%.

nyt-historical-interest-rates

Should I buy down my interest rate?

Maybe. We’ve done entire classes to discuss the thought that goes into whether or not you should take any extra money you might have and what you should do with that. One argument is to take the money and buy down your interest rate to improve cash flow and buying down your interest rate makes a lot of sense if you intend to hold the property for the entire duration of the loan.

However, if you end up selling or refinancing the property before the full term of your loan it is a much less clear decision.

In most cases, and there are a lot of exceptions to this advice, I would recommend that you do not go out of your way to buy down your interest rate on Nomad loans. Use up your entire seller concessions and if that means buying down your interest rate a tiny bit then go for it. But adding additional money to buy down your rate may not be the best thing to do as a Nomad.

Does the interest rate matter?

Yes. Interest rate does matter quite a bit. The lower your interest rate on mortgages for Nomad the better your cash flow will be and therefore the easier it will be to qualify for the next loan.

It also affects how much and when you pay down your loan (debt paydown). The lower the interest rate, the more you pay off early in the loan and the less you pay off later in the loan. In other words… lower interest rates front load debt paydown on your 30 year financing.

What does the interest rate affect in the Nomad model?

The interest rate affects a few things directly and then a few things indirectly for the Nomad model.

First, higher interest rates means you’ll have a higher monthly payment, which means your cash flow will be lower. A lower cash flow will affect your return on investment and, probably more importantly, your ability to qualify for future loans. Positive cash flow helps (or in cases where cash flow is not positive… hurts you less) with you be able to qualify for future loans.

Also, higher interest rates affects how much of your loan is paid off and when. While it is true that regardless of your interest rate you pay off the entire loan balance on a 30 year loan over that 30 year period. How much you pay off each year varies based on your interest rate. You pay off larger chunks of your loan each year early on with a lower interest rate loan. You pay off larger chunks of your loan each year later on your higher interest loan. So, if you’re considering your return on investment and including debt paydown as part of that return, your return will look better with a lower interest rate loan than with a higher interest rate loan early on.

Now… indirectly… higher interest rates probably mean that property values are not increasing as rapidly and so your appreciation numbers for both property values and rents are probably a little lower than normal. I will add that I tend to model home appreciation and rent appreciation pretty conservatively at 3% per year as my default.

Does Nomad work with high interest rates?

Yes. The Nomad model still works with high interest rates. It just works better with low interest rates.

Does Nomad work with variable interest rate loans?

Yes. The Nomad model works if you decide to get a variable rate loan, but I would advise you to really consider getting fixed rate financing unless you plan to do a variation of Nomad that has you selling off properties every few years instead of the traditional version of Nomad where you plan to hold the property with the same loan for 30+ years. If you plan to hold the property for the entire duration of the loan term, it probably makes sense to take the interest rate risk out of the equation and get fixed rated financing in the beginning–especially with interest rates as low as they are.

Should I do a variable rate interest rate if it is lower?

Maybe. Most people will consider Nomad using the plain vanilla traditional approach of buying 10 properties over 10 years and paying those properties off over the next 40 years. If that is you, then doing variable rate loans probably is not the best option for you.

However, many Nomads will be doing a variation of Nomad where they are turning over properties and not holding them for 40 years. Maybe they’re changing out inventory to avoid having dated properties or to reduce or eliminate capital expenses on properties. In those cases, variable rate loans may be perfectly fine and in fact may actually improve returns with adding very little additional risk.

What is a normal interest rate?

That’s actually a very interesting question (small pun intended). It turns out the answer is a little more complicated than you might imagine.

If you we look back to the early 1970s (like in the chart below), you might answer the question several ways.

historical-interest-rates-from-1971-to-2013

Based on the chart above you might look at the chart and say… the average 30 year fixed rate mortgage interest rate looks to be about 7% or so. Averages are a little weird sometimes. You could have had an interest rate of 18% in the early 1980s and we’re seeing interest rates well below 5%.

So, what is a normal interest rate? 7%? Maybe.

To further complicate things, let’s take a look at the interest rates for long term 10 year treasury bonds. The 10 year treasury bond is not the rate for 30 year mortgages but it tends to track 30 year fixed rate mortgage rates relatively well.

nyt-historical-interest-rates

The long term interest rates from the chart above from the NY Times, suggests that the high interest rates in the 1970s to 1980s were the exception to the rule and that interest rates are pretty consistently below 5% going back almost 200 years.

Can I model Nomad with different interest rates?

Yes. I think you should consider modeling Nomad and try changing the interest rate to see how it changes things. That’s one of the reasons we provide you access to the Nomad Calculator Classic that allows you to model your own assumptions for Nomad.

Is it better to pay monthly PMI or to raise my interest rate and pay a one-time upfront PMI payment?

That’s a great question. Often when I model Nomad and explain it to people I talk about raising the interest rate so that there is a lender credit large enough to be able to make a one-time up-front private mortgage insurance (PMI) payment instead of a monthly PMI payment. And it makes sense to do it for modeling reasons since calculating what PMI actually is and when it goes away is much harder to do. However, making an up-front PMI payment and taking a higher interest rate might not be the best thing to do when you actually go and get the loan.

I’d encourage you to have this discussion with your lender when you considering different loan options, but usually it makes more sense to pay the monthly PMI especially in fastly appreciating real estate markets where there is a reasonable chance that the monthly PMI will drop off after a period of time.

Will different lenders have different interest rates?

Yes. Often lenders will have different interest rates and different costs of getting the loan. It is a good idea to shop around and get rates and fees from a few different lenders before deciding on one.

Should I decide which lender to use solely based on the lowest interest rate?

While it may be tempting to pick the lender to go with based exclusively on which one as the best combination of interest rates and fees, that may not be the best idea.

I have a client right now that selected a lender by the best interest rate and fees and he is wishing he didn’t because the lender is not performing and it is possible the entire purchase will fall apart because this particular lender is unable to hit the deadlines required for the purchase contract.

I’ve had other clients in the past that found they could not work with the lender they selected. Maybe it was a personality conflict, but what does matter is that it was a very uncomfortable, awkward and painful experience to get the loan done. Had these clients had an opportunity to go back and do it again, I suspect they might be willing to pay $500 more to have someone they enjoyed working with.

My advice to clients is usually to find a lender that has reasonable fees and a great interest rate but one that you enjoy working with. That may not always be the cheapest option.

Will the interest rate affect my ability to get my next Nomad home?

Yes… the interest rate on your loan affects the monthly payment you have on your loan. That affects your cash flow on your property when you go to rent it. And your cash flow either helps you qualify for your next loan or hurts your ability to qualify. So, yes… interest rate will affect your ability to get your next Nomad home.

Do you predict interest rates will go up in the next decade?

I do predict that interest rates will go up in the next decade like most other economists have been doing. However, economists have done an incredibly poor job of predicting interest rates for the last couple decades.

The following is a chart from a federal report showing interest rate on US treasuries and the prediction of interest rates in the future at various times. It shows just how bad we’ve been at predicting rising interest rates.

10-year-treasury-rates-with-historical-economist-forecasts

A similar chart from the NY Times shows a little more of history.

10-year-treasury-rates-with-historical-economist-forecasts-ny-times

Granted it probably was a little easier to predict dropping interest rates when we were at the peaks in the early 1980s.

So, yes… I do predict interest rates will go up, but probably not back to the highs that we say in the 1970s and 1980s. When we look at a chart of long term interest rates, the 1970s to 1980s was the exception to interest rates and not what we saw consistently for about 200 years.

Should I refinance to get a lower interest rate?

Maybe. In some cases, if interest rates were much higher than you can get now and if you plan to hold that property for a long period of time, it might make sense to refinance and reduce your interest rate when doing Nomad. You can calculate the costs of doing the refinance and see how long it will take you to get back to breakeven or make the refinance a worthwhile financial decision.

Why do we move into properties for the Nomad model?

With the Nomad model we buy properties (one at a time) and move into the property as an owner occupant. We do that for two primary reasons: down payments and interest rates.

With owner occupant financing we can buy properties will little or nothing down. Much harder to do that with investment property.

Again with owner occupant financing, we tend to get a slightly better interest rate than we could get buying an investment property. This improves cash flow and makes it slightly easier to qualify for the next loans.

Income FAQs

Do I need to earn more for each Nomad home that I buy?

Maybe. It really depends on the properties you’re buying.

In some cases you will need to earn more each year as you buy additional Nomad properties in year 2 on. In other cases the income you’re receiving from the previous Nomad properties you’ve purchased and are renting out will actually help you qualify for the next purchases.

So, what really determines whether you’ll need to earn more to buy more Nomad properties or less?

It is really the cash on cash return of the previous Nomad properties.

Cash on cash return is determined in part by the ratio of the price of the property you’re buying and the rent you’re receiving on the property. There are quite a few other factors as well though like interest rate and down payment as two additional examples.

The good news is that you can model how much you will need using the Nomad Calculator Classic.

With this Nomad specific calculator you can estimate the cascading effects of buying properties each year and how that impacts your income requirement. For example, with the following assumptions from the calculator:

2016-06-25_11-17-55

We’ve estimated the amount you’d need to be earning each year (assuming you have no other debt) to be able to qualify for the next Nomad home purchase in that year. Here’s a chart showing the gross monthly income required for your household using the assumptions above.

2016-06-25-income-for-200k-property

If you take time to play with the calculator you will start to see the importance of buying the right properties when utilizing the Nomad model.

Do I need to qualify for each new loan with Nomad?

Yes… just like when you buy any other home, with Nomad you will need to qualify for each new loan that you use to buy a Nomad property.

Qualification often includes talking to a Mortgage Broker and providing them with documentation to prove your income and assets and having them pull your credit.

Depending on the properties you’re buying with Nomad, it may get easier to qualify for future loans based on the income you’re receiving from the properties you’ve converted to rentals or it may become more challenging (usually in cases where you have negative cash flow).

That’s why it is so important to select properties that would make good Nomad properties when you’re purchasing.

How much do I need to make to do my first Nomad?

How much you need to make to do your first Nomad property really depends on a number of different factors. Some of those factors are:

  • The price of homes that you’re planning to buy – the more expensive the home, the more you’ll need to make because you need to be able to support the payment on the property for the first year that you are living there and do not have any rent coming in.
  • The amount that you put down – the less you put down the higher the monthly payment you’ll need to be able to afford.
  • The interest rate that you are getting on your loan (which is partially dependent on your credit score) – the higher then interest rate, the higher your monthly payment will be so you’ll need to earn more to be able to qualify to buy the home.
  • How much other debt you have – part of the qualification process uses your debt to income ratio. If you have other debts like car loans, student loans and/or credit card debt, you will reduce the amount of home loan that you can qualify for.

You can use the Nomad Calculator Classic to model the property you’re buying to see how much income you might need to earn (assuming no additional debt). I ran a scenario with a $200,000 home. Here were my assumptions.

2016-06-25_11-17-55

With those assumptions and no additional debt, you’d need to be earning approximately $2,547 per month for your household to be able to afford your first Nomad property. Here’s a chart showing the monthly income requirement for 10 Nomad purchases over 10 years.

2016-06-25-income-for-200k-property

Home Warranty FAQs

Should I buy a home warranty when I’m buying?

Some Nomads see great value in buying a home warranty to reduce the risk of a repair on a home they’re buying. The home warranty companies, like an insurance company, are in business to make money so they are trying to collect more in premiums then they need to pay out in claims.

So, over a large group of people they’ll almost always collect more by having people buy home warranties then they’ll pay out in repairs. However, any one individual could pay the relatively small home warranty premium cost when they buy a home and have a claim that exceeds the cost of the home warranty. When you find yourself with a repair covered by a home warranty that would have exceeded your premium you’ll probably be happy you purchased the home warranty.

Personally, in general I am neutral to home warranties. I can see situations where many of the home components covered by home warranties are nearing their end of life and a home warranty seems like a really reasonable investment where you’re reasonably likely to be able to make a claim. For clients that have resources and are willing to take on those risks themselves, paying an up-front premium of a home warranty may not be necessary.

How much does a home warranty cost?

The price of a home warranty varies depending on the company providing it, the market that you’re in, what is covered and the length of the plan.

In Northern Colorado a basic home warranty that covers your home for about a year will cost about $350. A home warranty plan that covers a little more might cost $450 to $500.

Can I buy a home warranty after I have a problem?

Not usually… most home warranty plans exclude pre-existing conditions so you can’t wait for a problem to happen and then try to buy a home warranty to have that problem fixed.

Should I buy a second year for my home warranty?

Sometimes I think it would be worthwhile to pay for a second year on your home warranty. If you thought the age and/or condition of some of the systems covered by a home warranty in your home were worth getting a home warranty policy to begin with and those systems still exist, it might be worthwhile extending your home warranty for another year.

Is there a deductible for home warranty claims?

Usually you do pay a service fee for the technician to go out and diagnose the problem so in a sense there is a deductible for each service call.

The technician then determines if the item needs repair or replacement and that cost is what is typically covered by the home warranty.

Are home warranties a scam?

Some people use the word scam in a general sense to describe something they don’t believe is good value. Some people would argue that if you pay money for something (like a home warranty) and never use it, that you’ve been “scammed” out of money.

I think that a home warranty does provide a valuable service. It is true that you could pay for a home warranty and that nothing with your home could go wrong and that you could never make a claim. On the other hand you could pay for a home warranty and save yourself thousands of dollars if things do go wrong and it is covered by a claim.

Also, there are probably some home warranty companies that are more reputable and reliable than others.

So, home warranties in my opinion are not a scam and can, in some cases, be a good value.

Should I get a home warranty with new construction?

Some people would argue that buying a home warranty on a new construction home doesn’t make any sense. They’d argue that everything is brand new and that most builder’s include a one year warranty themselves. Where’s the value in buying a home warranty policy in addition to the builder’s warranty?

Well, the home warranty policies I’ve seen (and some very astute investor buyer clients of mine have purchased) usually cover more items than the builder warranty covers and for a much longer period of time. The client I am thinking of purchased a 10 year home warranty on several new construction rental properties they purchased for about $1,600. They’ve now got all the major systems in their rental properties and appliances covered for about $160 per year.

Who pays for the home warranty?

Anyone can from the buyer to the seller, to either real estate agent in the transaction. A legacy Nomad parent could even purchase a home warranty as a gift for their child purchasing their Nomad properties.

Should I provide a home warranty when selling a home?

Some sellers, and I would agree with them, that there is some liability in selling a home and having something unexpected break once the buyer moves in. Occasionally, a week after moving in the furnace or air conditioning fails and the buyer thinks the seller knew it was going to happen (which they did not).

To prevent buyers feeling wronged when the unexpected happens sellers have purchased home warranties as a way to protect themselves and provide a valuable protection and peace of mind to their buyers. If something goes wrong within a year after the sale, they can call the home warranty company and for a small service fee has the problem repaired or replaced.

Does the real estate agent pay for the home warranty?

In some transactions, the real estate agent representing the buyer or the seller will offer to include a home warranty. Some real estate agents include this as part of the service they offer.

I personally do not automatically include this as part of the service I offer. However, in extremely rare situations depending on the particular house and whether I believe a home warranty would be a good investment and the relationship I have with the client, I may offer to personally pay for a home warranty for the client. For example, if there is a first time home buyer really stretching to buy their first home and they’re buying a home that has many of the major systems toward the end of their lifespan, I’d prefer to know that they’re not going to get hit with an unexpected furnace repair or replacement within their first year. In that case, I may opt to give a home warranty as a closing gift.

Do I need to get an inspection to get a home warranty?

It depends on the home warranty company. I know of at least one company here in my market in Northern Colorado that if it is a sale, they do not require an additional inspection to provide you a home warranty. However, if you’re trying to buy a home warranty on an existing property you own, I think they would require an inspection.

Will a home warranty cover a roof?

While some home warranty providers may cover roofs or roof leaks in their normal plans, the ones I am aware oif do not include roofs or roof leaks in their normal plans. It is available as an additional upgrade though.

Will a home warranty cover a furnace?

It depends on the home warranty company, but most will cover a furnace in their standard plans.

Will a home warranty cover an air conditioner?

Again it depends on the home warranty company but some will include air conditioning in the basic plan. Others may require you to be in their higher level plans or to add it on as additional coverage to include air conditioning. You’ll want to read the plan carefully.

Will a home warranty cover a refrigerator?

Are you noticing a pattern here when I say it depends on the home warranty company? Most home warranties will include refrigerators in their basic plan.

Will a home warranty cover a stove?

Most will include coverage of a range/stove but you will definitely want to check the policy you’re buying.

Will a home warranty cover a microwave?

Many home warranty companies will include coverage for built-in microwaves (not stand alone counter-top microwaves). Of course, you’ll want to check to make sure it is included in your policy.

Will a home warranty cover a swimming pool?

Most home warranty companies will not automatically include coverage for a swimming pool. Most will offer coverage on a swimming pool for an extra fee.

Will a home warranty cover a washing machine or clothes dryer?

Some will, some won’t. Some will require more than the basic plan to include a washer and dryer.

Will a home warranty cover a flood?

Not usually. There is separate flood insurance you can buy to cover floods.

How long does a home warranty cover?

It depends on the plan that you buy. Many home warranties are sold and cover a period of 1 year.

Are home warranties transferable?

It depends on the plan. You would need to read your policy to see if the home warranty is transferable should you sell the property.

Should I get a home warranty on a fixer upper?

Maybe. If you’re planning to buy the property and immediately rip out all the items that are normally covered to replace them with brand new items, then buying a home warranty is probably not a worthwhile investment.

However, if you’re going to fix up certain things and the things that you’re not going to fix up are things that would be covered, it might make sense to get a home warranty on a fixer upper. On one flip that I did with a partner, we did not replace the furnace, but provided the buyer with a home warranty at the time of sale. It turned out to be a great investment for the buyer (even though we paid for it) because he ended up getting a brand new furnace out of it.

Am I required to get a home warranty?

Nope. Home warranties are optional and are not required.

Where do I buy a home warranty from?

You can search for home warranty providers on the web in your market or ask your real estate agent. Most home warranty company representatives are trying to make sure that real estate agents know about them and their offerings.

Does the real estate agent get a kickback or commission if I buy a home warranty?

Not usually; it would be really uncommon if they were. And… if a real estate were to get a kickback or commission for you buying a home warranty, it would need to be disclosed to you in writing to comply with RESPA.

How do I make a home warranty claim?

You’d contact the home warranty company on the paperwork you were given (usually at closing).

Is a home warranty the same as the builder’s warranty on new construction?

A home warranty is not the same as a builder’s warranty. They often cover different things as well.

Should I document all conversations with home warranty companies?

Yes, whenever talking to an insurance company or financial institution it is always a good idea to document the date and time of your communication, who you spoke to you (especially if you talked to several people or departments), what was discussed and what the agreed outcome was.

If you have a CRM, you might want to document these conversations in your CRM. If you do not have CRM, then you may want to document your notes in journal or notebook. If you don’t have a journal or notebook, the last resort would be to use sheets of paper and store them in the file where you keep your related home warranty documents.

Foreclosure FAQs

Can I do Nomad with a foreclosure?

If you’ve had a foreclosure in the past and you’re wanting to get your financial life back in order maybe with Catch Up Nomad, you may be wondering… is it even possible to do Nomad if I had a previous foreclosure on my credit report. The answer to that question is yes… you can do Nomad if you’ve had a previous foreclosure.

However, doing Nomad after a foreclosure does requires that you do things a little differently since you’ll be severely limited in your ability to get loans for a period of time.

To get your first Nomad property, you’ll probably do an FHA loan first since they’re the easiest to qualify for a loan after a foreclosure. The typical waiting period for doing an FHA loan after a foreclosure is 3 years. So, you’ll need to be 3 years after your foreclosure to be able to do your first FHA loan for Nomad.

After your first loan, we often recommend that you do conventional financing with Nomad. With a foreclosure this becomes increasingly more challenging since the waiting period of conventional financing after a foreclosure is 7 years.

There are some creative strategies we can utilize to do a modified version of Nomad after a foreclosure and I will be teaching a class or two and writing a few articles about that in a future update.

Should I buy foreclosures?

For the Nomad model, you can buy a foreclosure property, but it is in no way required. You’re presumably looking to buy a foreclosure because you believe you believe you’re getting a deal and buying the property at a discount. This may be true for you.

While I did not invent the idea of buying a home as an owner occupant and then converting it to a rental, we did name the process Nomad, did some fancy mathematical modeling of it and created a comprehensive series of classes and resources for Nomads looking to implement the model. In our market in Northern Colorado when we first started about Nomads riding their mammoths from cave to cave acquiring rental properties as they went… foreclosures were extremely scarce and the ones that were for sale, were often not deals at all. So, the Nomad model does not, in any way, require you to be buying foreclosures.

Nomad works even if you buy a property for full retail price. So, it is not required that you limit your property selection to just foreclosures or that you buy foreclosures at all.

Now… if you happen to be in a market where foreclosures are plentiful and there is one that looks like it would be a great Nomad property for you… I approve of you buying a foreclosure in those circumstances.