Tag Archives: first time home buyer

I Can Afford That, Right?

When looking at buying a house, there are a lot of things to consider. Do you NEED a two-car garage or do you just WANT a two-car garage?  Do you have a school district preference or prefer a certain city so you can be closer to work?  Do you want a rambler or a two-story and do you need a fenced-in yard for your furry family member?  Do you prefer to avoid outside maintenance, making a townhome a better option?  Is it important the house is updated or are you pretty handy at DIY?

Some of these decisions are a basic “wants” vs. “needs” analysis. Obviously, if you had a household of four people, a one-bedroom home won’t cut it – that would be a “need,” whereas having a pool in the back is more of a “want.”  Lot’s of things to take into account.  The most important though, should be what price home, or payment, that you can really afford.  Buying a house isn’t just a house payment for the next 30 years – it’s a commitment along with other financial responsibilities.

Many of you may be renting right now and, quite possibly, could be paying more in rent than what you can afford for a house payment. One of the mortgage lender’s goal is to help you get financing, but the main goal should be to make sure that whatever financing you obtain, you are comfortable with the payment.  Let’s face it, you’ll have this payment for the next 30 years and eating ramen noodles every night doesn’t sound like fun.

So how do we determine what payment/price you can afford? Lenders use something called ratios to determine your qualifications.  Ratios take a certain percentage of your GROSS monthly income, taking into account other monthly debts you have, to come up with a maximum house payment.  Sometimes, that top-end payment is NOT what you want to pay because it puts you out of your comfort-zone.  And if that’s the case, please let your lender know that!  There is no reason you should ever pay more per month than what you financially can afford.  You know your spending habits much better than your lender.  That said, if you think you can spend more than what the lender determines you can afford, we can’t increase it just to make you happy.  To make that work, your income has to be higher, debts lower or you may need a co-signor or co-borrower to bring that payment to what you feel you can afford.

Different loan programs have different guidelines for ratios. One constant is that your monthly income is looked at in gross terms versus net (after taxes/deductions).  The exception to this is if you’re self-employed.  In this situation, we look at the NET profit or loss on your federal taxes (assuming a schedule C filing) since this is what you got taxed on.  Also, different types of income might be looked at as an average over two years.  You’d want to check with your lender about how they will look at your specific situation.  For now, let’s keep this simple and use an FHA example assuming the person is salaried at $5000/month and has $650/month in debts.

In the example below, notice that there are TWO percentages being used. The first, we call the housing ratio.  This determines the maximum house payment you can make based on your monthly income.  The second is called the debt ratio.  This is based off your monthly income too, but now factors in any monthly debts you have (credit cards payments, car loans, other house payments, installment loans, lines of credit, ongoing payments to the government for taxes, alimony, child support, overdraft protection balances, etc.)  We will take the lesser of the two calculations to determine the maximum payment you can afford.  FHA guidelines allow 31% for the housing ratio and 43% for the debt ratio.  Some lenders may be willing to exceed these ratios, please check with your lender.

 

 

In this example, the buyer can afford a $1500/month house payment. The payment includes principal and interest on the loan, a monthly amount for property taxes and monthly amount for hazard/homeowner’s insurance and monthly mortgage insurance, if applicable.  If you were looking at a townhome, or something with monthly association dues, the lender would also factor this into the maximum payment you can afford.

Let’s say $1500/month puts you at a purchase price on a single family home (no association dues) at $220,000. You’ve gotten yourself pre-approved and are out looking at homes.  Did you know that you could look at multiple homes, ALL listed at $220,000, and possibly not qualify for ANY of them?  I know, I know … but your lender said you could look homes at that price.  So what gives?  Ultimately, you are getting pre-approved for a house payment, NOT a price.  The price of the property is a guide, so to speak.  In this example, if the lender used $229/month for the property taxes and ALL the homes you looked at had taxes higher than $229, then your payment would end up being higher than $1500, hence you wouldn’t qualify.  Not only will taxes affect the price you can afford, but so can the interest rates, association dues and hazard/homeowner’s insurance.  These are all moving parts to the home purchase puzzle!

As lenders, we do our best to give you an approximate price point, but knowing the above will hopefully help you understand that some houses you look at, though you were told the price would work, just won’t. Alternately, the house you look at could be $190,000 and the taxes could be crazy high,  making the payment higher than $1500, meaning you can’t afford even THAT lesser priced home.  It’s nuts, I know.

Remember I mentioned this was a single family home? Pretend you change your mind and start down the townhome or condo path.  If that should happen, then your $1500/month payment MUST also take into account association dues, which can vary dramatically.  This will lower your purchase price power approximately $20,000, maybe more depending on the dues.  Best advice here – talk to your loan officer if you decide to change property types so you can get a more accurate price range to be looking in.

So the question – “I can afford that, right?” has the wishy-washy answer of “maybe.” First, remember your income and your monthly debts will determine WHAT payment you can afford monthly.  And second, the payment you can afford will get varying results on whether you can afford a specific house depending on interest rate, property taxes and homeowner’s insurance amounts.  Your lender will get you pretty close to the price range you can look in so you have a starting point, but at least now you have a better understanding as to why you might not be able to buy the house you thought you could afford.

My goal is to provide education and a clear understanding of the process and your goals. It would be my pleasure to help you with your homeownership journey.

You Through the Underwriter’s Eyes — Collateral

When you buy or refinance a house, and you take a loan out for that home, you are looked at from a few perspectives. As mentioned in the previous few blogs, there are four items a mortgage underwriter looks at — the four C’s — capacity, credit, cash and collateral.  Though you may be credit-worthy, have enough cash (or assets) and have the capacity to qualify (sufficient income), the collateral, or the house you’re purchasing/refinancing, may not be up to snuff.  Let’s look at what is important to the underwriter for this final blog in the series.

It would only make sense that the house you’re taking a loan against would be of importance to the mortgage lender. Like with a car, when you do a trade-in at the dealership, they want to make sure it works, isn’t too old and probably a few more attributes that I am not privy too since I am not in that industry!  But they want to inspect it and make sure it’s worth what they give you for a trade or a loan.  Same thing with the house you want to purchase or your current home you want to refinance.  We want to make sure we are making a good investment.

Courtesy of Stuart Miles|freedigitalphotos.net

I want to first start with something that is not required on the part of the lender to determine this – the inspection.  This is something you choose to do even before the lender starts their process of determining acceptability of the home.  The inspection is your way to determine if the house is acceptable to YOU.  And of course, if you’re going to live there and make the investment of money and payments, you definitely want to make sure it’s worth it.  You pay the inspector directly and costs can average from $350-$550.  They will look at the structure, necessary maintenance and point out the good and the bad.  If you made your offer contingent on an inspection, this will help you determine if you plan to move forward or not.

The lender, on the other hand, will send an appraiser out to the property. This also costs you on average $450 – $550 (possibly more depending on the property type).  The cost for this is typically lumped into the closing costs you pay at closing, but some lenders will collect this prior to ordering.  The appraiser is chosen randomly from a list as to avoid any influencing from the lender.

The appraiser’s main goal is to confirm value is there by giving their opinion of value – meaning, for a purchase, making sure the house is valued at what you paid for it. In the appraisal they give supporting detail on how they arrived at this number using similar properties – meaning same style, approximate size, similar number bedrooms/bathrooms and similar amenities, to mention a few characteristics.

The appraiser will research homes that have sold and closed in the last 12 months to use as comparable properties. They need to use at least three closed sales and need to look at one inferior property and one superior property to the one you’re purchasing or refinancing.  This way, there is a range for comparison.  The more recent those closed sales, the better indicator of current value.

They will provide a description of the property and assess condition and marketability of the home and detail any other property issues, if any. It could be that the home has deferred maintenance and the roof shingles are peeling.  This is a cause for concern and affects the condition.  The appraiser may require the roof to be repaired prior to closing.

Or maybe the house is on a very busy street or directly under the flight path of the airport – these can affect marketability.   And you know the adage … “location, location, location”… This is so true with appraisals too.  Maybe it’s overlooking a bluff with views or the local waste site.  These can affect the value of the home.

Similar homes used for comparable properties should be in the same general area as the home you’re financing. If you’re buying in the city, the homes should be within blocks of each other and easy enough to find homes similar to the one you’re financing.  On the flip side, a rural property will be harder to find comparable sales since the houses themselves could be quite a distance apart, plus there won’t be as many.  The appraiser may have to extend their search for closed properties out further in distance and may have to look further back in time to find those closed properties.

The appraiser is the eyes for the lender. They are reporting on what they see.  Pictures are provided so the underwriter can review the home to see if there are any blatant issues and that the properties used for comparison are really similar to the subject property (home you’re financing).  Appraisals are objective, so different appraisers could value a home differently depending on their training or data they find to support the value.

Financial adjustments are made to the sale price of the comparable homes to make them more similar to the home you’re purchasing. If the home you want to finance has a 3-car garage and one perfect comparable property (size, style, # bedrooms, etc.) has a 2-car garage, then that one would be adjusted down since a 3-car garage would be more valuable than two.

Also important to know is that mortgage lenders will lend on the LESSER of the appraised value or the purchase price. As an example, if you purchase a home for $100,000 with 5% down, that means you are financing $95,000.  Let’s say the appraisal comes in at $97,000.  If nothing can be renegotiated with the seller, then the lender will only lend $92,150, which is 5% down off the VALUE of $97,000 since that is the lesser figure.  As the buyer, you would then need to come up with the difference between the value ($97,000) and the price you paid ($100,000).  This would go back to the third “C,” cash, and confirming you would have the means/resources to do this.

Biggest thing to understand here is that this fourth “C” is not about you – it’s about the home. There isn’t anything you can do about the appraisal.  The hope is it will come in with the necessary value and no additional work requirements.  But if it doesn’t, your lender will work with you, and the possible real estate agents involved, to find a solution, if one is available, to make your financing work.  We all have the same goal – helping you finance your home.  We want nothing more than for you to have your house to call “home!”

You Through the Underwriter’s Eyes — Cash

This is the third blog in a series of four covering the criteria the underwriter looks at when they make a loan decision. The four C’s, as mortgage lenders call them, are capacity, credit, cash and collateral.  Today I want to address cash and I know everyone wants to have lots of that!

Cash is a literal word, meaning notes, currency or coins. Cash, in our lending world, is verifiable assets that you have available to use for the purchase of your home, whether that’s to cover down payment or closing costs, and in some instances, reserves.  Reserves would be assets you have left over after the purchase.  Some programs require reserves, and if your loan program does, your lender will advise how much you need post-closing.

Most commonly, cash is the money you have saved in a checking or savings account.   Cash can also be accounts that aren’t completely or immediately liquid like stocks, mutual funds or retirement.  Guidelines for the loan program you do will determine acceptability of these funds.

Interestingly, cash – actual currency or coins – is typically not acceptable in a purchase or refinance transaction. Seems contradictory to what we are trying to verify, doesn’t it?  What I mean is two-fold.  First, you cannot go to your closing day with a suitcase full of $100’s to pay for your down payment and costs.  The funds must be from an account, such as a checking or savings account, something liquid.  More than likely, you will either wire the funds or bring a cashier’s check to closing.  You won’t physically bring in the green!

The second part is that cash deposits into your bank accounts typically won’t be counted as your available liquid assets. Again, seems odd, especially if you commonly save money at home or in a safe deposit box and then deposit it into your account.  It’s your money, so why isn’t this allowed?  Such a good question and it comes back to verifiability.  There is no way for the lender to prove that the funds are yours to begin with or prove they are not.  Also, that money could be a gift or from a loan, both options requiring further explanation and documentation.

Now, I did say that cash is typically not acceptable.  There are some instances where cash deposits may be okay.  Let’s say your position has regular pay but also has tip income.  It is probably a normal part of your deposits to put cash into your account due to the nature of your job.  This, and other situations where cash deposits are common, are looked at on a case by case basis to satisfy lender or investor guidelines.

In terms of documentation, we will request the last TWO months bank statements to verify your assets or the last quarterly statement you have for investment accounts, such as mutual funds or retirement. We may ask for explanations, and possibly document, any deposits that are out of the ordinary from your regular work direct deposits.  If you hand-deposit checks each pay period, we may need copies of those checks to confirm they are work related.

Assets other than a checking or savings account (including money market), are usable for closing. We would not only document having the funds, per statements mentioned above, but we may need to verify liquidation of the funds and then prove they are indeed in a liquid account.

Did you know that retirement is acceptable for down payment and closing costs? A withdrawal is allowed and we would verify this; but in some instances, a loan against the account would be acceptable assuming your company allows for this.  And the really good news?  Any monthly payment you have from setting up a loan against your 401K is NOT considered in the ratios (discussed in the credit “C”).  Of course, we will verify this transaction going out of the 401K and going into a liquid account.

Most programs allow for gifts from family members, so this may be an option for you. This money may, or may not, already be in your account.  There are specific guidelines to follow and documentation requirements vary depending on the loan program.

What if the assets are tied up in other property? Taking a loan against a home, such as a home equity loan, may be acceptable as well.  Same would apply in that we would verify the receipt of funds.  Now that you have a loan, there will be a monthly payment that WILL have to be counted in your ratios.

Biggest thing we are looking for is to make sure you have enough for closing costs and the required down payment. We do look for a history of deposits and make sure that there aren’t any out-of-the-ordinary deposits.  If you have a history of overdrafts, this may negatively impact the loan decision, but ultimately, it’s up to the underwriter based on your history, hence the reason we get a few months of statements.

Check with your lender to determine the acceptability of assets you intend to use and the requirements. Many lenders may follow the same guidelines, but it’s still best to ask.  Best advice, save and then save some more and make sure you can verify all non-work deposits!

Last up of the four C’s of underwriting will be collateral – the house you’re buying or refinancing.

You Through the Underwriter’s Eyes — Credit

Credit is super important in financing a home, and these days, even more so.  In my previous blog,  I introduced how underwriters make a loan decision based on four criteria – capacity, credit, cash and collateral.  That blog went over capacity – otherwise known as your income and employment.  Today, we will get to know what role credit plays in your loan decision.

Credit score trumps many things in today’s lending. For instance, you could have sufficient income, plenty of assets (money in the bank), but you don’t have the necessary score set forth by the investor.  Because of this, you might not be eligible for financing until your score meets investor requirements.  These “certain” scores will vary depending on program and lender.  Your individual credit scores are generated through three credit bureaus – Experian, Equifax and TransUnion.  Not everyone has scores and some people may have less than three scores due to a lack of or length of credit history.

As a consumer, you have the right to look at your credit report annually for free. You can visit www.annualcreditreport.com.   Getting your scores will cost you though, so be prepared to pay something to see your scores (costs vary).  A best first step is to visit www.myfico.com to learn from the best!  Your score may be available via other methods, such as your credit card company or outside companies you may pay to monitor your score.

The important thing to know here is that most mortgage lenders use the FICO scoring system, created by Fair Isaac Corporation in the 1950’s (source).  There is another major scoring system called Vantage, established by the three credit bureaus (source).  While Vantage scores are accurate under Vantage, they are not what the majority of lenders use for your score, so they may not be an accurate indicator when it comes to mortgage financing.

To unintentionally confuse matters, BOTH scoring systems pull from the three bureaus, one of which is Experian and their score is actually called a FICO score. Under the Vantage system, your Experian FICO score may be different than the FICO score under the FICO scoring system. Always best to know what system is being used to generate your score, especially since your lender is probably using the FICO system.

We now know score is the starting point, but it’s not the only point. In a previous blog, “No Credit = No Loan” alludes to, you don’t necessarily need a score.  But, we still need to look at your history.  Your score is an indication of how well you pay your bills, how much you use your credit (allowable limits in relation to actual balances), types of credit you have (revolving vs. installment), length of time credit has been established and recent inquiries (credit checks) into your credit.  And by the way, your score is literally a snapshot on the day it was pulled so it could vary daily.

Lenders are trying to determine your willingness and ability to repay the loan. Sometimes the score doesn’t tell the whole story, so they do look at other things.  Have you had any late payments in the last 12 months (may go back 24 months depending on program)?  Are there any outstanding collections or any other major derogatory things like judgments, bankruptcy, foreclosure or short sale?  If you have had one or more of the major derogatory items, the waiting period for new loan will differ depending on the loan program you use.  And guidelines for collection accounts will vary by program too – whether they must be paid or not.

Your monthly debts, items on the report and items not on the report, such as child support, alimony or tax payments, all need to be factored into that you can qualify for. The lender will run ratios, or percentages, to determine your qualifications using your usable/verifiable monthly income in relation to your monthly debts.

As an example, using monthly qualifying income at $5000/month and monthly debts at $650/month, below is how the figures shake out. These ratios are standard guidelines for FHA financing and will differ with other loan types.  The debt piece under credit goes hand in hand with the capacity part – income.

Sometimes, the underwriter also wants to know the “why” behind any derogatory items. What was the reason you had a bankruptcy or late payments on the credit card.  Again, they look at the whole file, as well as guidelines of your loan program, to determine the necessity of explanations.

To sound like a broken record, credit is the utmost importance when it comes to your loan. The advice here is simple: pay your bills on time; keep your balances status quo while in the process and do not close any accounts or open any new accounts.  If you have had derogatory items in your past, a lower score or no credit, start early and get in touch with a lender to discuss what you need to do to be ready for your exciting home-buying journey!   Next up of the 4 C’s – Cash.

You Through the Underwriter’s Eyes — Capacity

What is an underwriter? This is the person who will review your file to make sure you meet the guidelines set forth by the program you’re doing.  Underwriters determine if you are a good credit risk for the bank or lender, so they look at four different aspects of your situation.  We call these the four C’s to underwriting – capacity, credit, cash and collateral.  This blog focuses on your income and employment, which fall under capacity.

Employment is NOT necessary to get financing, but what is necessary is income to determine you have the ability to repay your new loan plus any other debts you have. Non-employment income can come from social security, disability, pension, alimony, child support or even interest you’ve earned via investments.  Depending on the loan program you’re doing, we need to verify a history of receipt and determine that it will continue for at least three years.  Depending on the income type, the methods we use to verify the income will vary.

With employment, the underwriter is looking at past history and the likelihood of job continuation. We realize that no one knows when a job may end, but past history and a current verification from your employer will help us answer that question.  Sometimes an employer will write “no” in the box labeled “probability of continued employment.”  If that happens, we may have a difficult time justifying the employment, thus income, we are using for your qualifications.

The underwriter is also looking for a two-year work history if we are using employment income for qualifying. You don’t need the same job for the last two years, though that’s certainly preferable.  If you had been out of work for an extended period of time, say three – six months, you may have to be on your new job for a certain timeframe to use the income for qualifying.  That timeframe will vary on programs.  We still would need to verify a two-year work history prior to the time off.  If you were a student in the last two years, for instance, we can use this as part of your “job” history and would obtain unofficial transcripts from you to prove this.

If you have a history, especially in the last 12 months, of changing jobs frequently (more than two – three times), this may make it tougher to use the income as well since it’s hard to predict, based on history, that the current job we’re using for income will be stable. Certainly, people change jobs to get better pay, hours or even benefits.  We aren’t faulting you for bettering your situation and applaud that, but frequency of those changes could be harmful.

What about changing jobs in the process? It is certainly acceptable to do so, but you should always check with your loan officer first.  Remember, underwriters are using your current income pay structure to determine your qualifications.  Let’s say you are a salaried employee now and have the option to go to a base (less per year) plus commission.  My guess is you may take this option since you may have a higher earning potential.  The problem is that lenders can only use the commission income for qualifying if you have a two-year history of receiving this type of income.  If you don’t, then the numbers the lender has given you would be inaccurate since they were based on the higher salary, not the lower new base pay.

And yes, we really like things in two’s! For instance, when it comes to income, or your capacity, we look at types of income differently.  If you are salaried, we can use that as your income and like any proof, we will confirm this with recent paystubs, W2s and possibly tax returns.  If you are hourly, and you work the same hours per week, we can use that easily enough.

If you work variable hours, then we may need to average your income over the last two years and current year to determine what your monthly income works out to be. Commission, overtime, bonus, tips and self-employment all need to have a two-year history to use it for qualifying.  Sometimes, a lesser time frame is allowed, but that is dependent on the type of income and loan program you’re doing, as well as your specific situation.  This income, since variable, will be averaged over 24 months and if it’s declining, we may have to use the lower income or could not use it.

Interestingly, lenders will use your GROSS income to determine qualifications (unless you’re self-employed, then net is used). Seems a little odd to do this since you don’t get that much in your paycheck, do you?  But, we have to put all people on the same playing field.  If two people had the same salary, but one opted to put max into their 401K and the other had health insurance costs, their net income would be vastly different, possibly giving one person more qualifying ability over the other.  So, we use gross income and we use something called ratios to determine your qualifications.  This just means, based on the program you’re doing, we take a percentage of your gross income and subtract your monthly obligations to determine a maximum payment you can afford – but that’s another blog!

In the lending puzzle, capacity – income and employment, is just one piece of how you are looked at from the underwriter.  Next up will be credit and really, for some, that is the cornerstone of starting your financing process.

No Loan = No Credit … Or Not?

You hear it all over the news and on advertisements how important your credit score is. I agree … your score is absolutely important and has become the first go-to thing lenders look for.  Lenders want to know what your score is, how long you’ve had credit and how well you pay your bills on time.

But what if you’re one of those people who doesn’t have a credit score? It happens, even to some people who have some credit established.  Maybe the history isn’t enough for a FICO (Fair Isaac) score to be generated or there are just too few items on the report.

As an experienced loan originator, I’m here to give you some hope. Not all loan programs require a credit score.  The main criteria – you must meet the eligibility requirements of a MN first time homebuyer program.  In conjunction with this, we will use FHA financing which allows us to create credit.

Really, what it all comes down to is WHAT you have for debt obligations outside of a traditional credit report. It’s imperative that we create credit for the lending process.  This means we’re looking for accounts that you pay on a monthly basis, ON TIME and over the last 12 months.  Our goal is to verify three established accounts.  You need at least one account from either rent, telephone service, internet, TV service or utility company (a utility not included in your rent).

So, what do we look at? Are you renting?  Are you on time?  If it’s a management company or apartment complex you pay, we can verify directly with them your timeliness.  If you pay a private party, we want to see the last 12 months cleared checks from you to demonstrate you’ve paid on time.  As a tip, if you’re living at home, it makes sense to pay something to your parents, same amount EVERY month, for 12 months, always due the same time (say the 1st of the month) and via a check or direct transfer to their account.  This way, regardless of the amount, we can look at your history as a source of good credit.

What about other sources? Here are some quick reference items that you may pay monthly that can be used to create your credit history.  These items must be in your name.  This list isn’t inclusive, but a way to get you thinking about what you have out there and how it can help you get your first home!

Utilities, cell phone, car insurance, weight loss plans, lot rent on a mobile home, renters insurance, health club payments, child support/alimony you pay outside of your work paycheck, Netflix, gaming sites, internet or iPad-type services, lay-away, outside health insurance or monthly payments to a doctor.

It’s important to note that not only are we looking at your off-report debts, but we also look at any debts you have on the report. There are certain guidelines we follow to determine credit worthiness, such as seeing no more than TWO 30-day lates on any installment payments in the last 24 months and there is no major derogatory credit on credit cards in the last 12 months – that means, no more than 90 days late.  Truthfully, having NO lates on anything is the best way to work toward a loan approval.

There are certainly other guidelines that your situation must meet in order to get an approval on a loan. These are things above and beyond credit.  Your lender will go through these items with you and hopefully prepare you for what you need in order to be ready to buy.

Not all lenders allow the creation of credit, so you’ll want to check. The main idea I want to get across is that having no credit doesn’t necessarily mean no loan.  It’s best to find a lender you’re comfortable with, and one that has the ability to walk alongside you to make your dreams become reality!  I am here to help if you so desire!

What to Expect when You’re Expecting to be a Homeowner

A little play on a book title, but if you’re like me, you feel better about taking on something new when you’re prepared –whether it’s going to college, starting a new job, becoming a parent or buying your first home. When you understand the process, the task itself isn’t so daunting.

The first thing to realize, as you leap into home-ownership, is the need to get pre-approved for financing. The lending industry is under scrutiny in an effort to protect you, the buyer.  Due to this, lenders are required to prove you have the ability to repay the loan.  This means you will be required to provide supporting documents.  This can become quite cumbersome, and frankly, frustrating.  We understand – believe me!  Our goal is the same as yours … help you get a loan.

The first step is the loan application. To make this convenient, we can gather this

courtesy of Stuart Miles|freedigitalphotos.net

information over the phone, on our internet site or in-person, whatever is best for you.  We need information such as your name, contact information, addresses and employers for the last two years, income, assets and your debts.  The application enables us to obtain credit to determine if you meet today’s credit guidelines, which vary by program and financing type.

From there, if all looks good, we gather supporting documents, such as paystubs, bank statements, etc. This information will initially be reviewed by the loan officer for validity and to determine if income matches what’s on the application, among other things.  It’s important to meet with your loan officer to discuss your options, the costs of buying a home, and most importantly, your comfort level in terms of a payment.

Once pre-approved, you’ll look at houses, and hopefully, will find one you want. At this point, you and your Realtor will draft a purchase agreement stating the terms of your offer – price, closing date, what you may want the seller to pay toward closing costs, earnest money amount and any contingencies you desire, such as having a home inspection.  Assuming you get the “your-offer-was-accepted” call, we move on to the next steps.

You may have chosen to do a home inspection. You will pay the inspector directly; this is not part of the closing costs the lender would have gone over with you.  The inspection will help you determine if you want to move forward on the purchase or not.  Hopefully, you are full speed ahead!

Now that you have a property address and aren’t just a TBD (to be determined) anymore, there will be disclosures that are generated for you to sign. Your lender may mail these, email you a link or sit down with you to sign depending on their process.  At this point, you will receive a loan estimate, which will outline all your costs, including down payment and seller paid costs or down payment assistance, if applicable to your situation.  Your lender most likely went over a similar type estimate at your pre-approval meeting so you had an idea what your costs would be.  The loan estimate is still an estimate but is much closer to actual figures now that we know the price, taxes, rate (if you locked) and closing date.

 

At this point, you can lock in an interest rate. Your loan officer will check to see what rates are for the program you’ve decided to use.  Keep in mind, if using a first time buyer program, they publish their interest rates right out on their sites – so the rate is the same with any lender.  Rate locks have expiration dates – that means we must lock the rate long enough to cover you through your closing date.  And something very important – once locked, you’re locked.  If rates go down after locking, you cannot get a better rate and if they go up after locking, the lender must honor that rate.

Depending on how long the time-frame was between your initial pre-approval and the accepted purchase agreement, the lender may ask for updated paperwork – items that get old, like paystubs and bank statements. Eventually, when your earnest money clears, we will prove that left your account.  And, if your credit report has, or will, expire before your closing date, new credit will need to be pulled.  The life on the report is 120 days.

The lender will process your file, order verifications of income, flood certification, appraisal on the home and title work, among other things. Depending on the lender, the file may go directly to the underwriter, or may hang back while the ordered items come in.  The best advice here – if the lender needs any additional information from you, please provide it in a timely manner to keep your process going as smoothly as possible.

Once all documents are in, including an acceptable appraisal and title work, your loan will go back in for final approval. Either after this, or prior to this, the lender will provide you with a closing disclosure, which you must have in your hands three business days (includes Saturday) prior to closing.  Some lenders require you sign this to acknowledge receipt in that time frame.  This will give you the final figures for your closing.

Now the fun — going to closing and getting the keys to your home! You will sign a bunch of documents, get a check or send a wire for money needed at closing (dependent on your program, down payment, etc) and will possibly have a chance to chat with the sellers to find out more about your new home, and maybe the scoop on your new neighbors!

For most people, this process, starting with the application, will take you 60-120 days depending on your situation and motivation. And for some, it may take nine months or longer J  Either way, hopefully this has given you a little more information on what to expect when you expect to be a homeowner!

A Necessary Evil and A Little History Lesson

If you are like many people buying their first home, or subsequent home, it may be tough to come up with a large down payment or much of any down payment. Whether it’s just hard to save, debts are too high or you aren’t realizing enough equity from the sale of your home, down payment savings are tough to allocate.

Ideally, a 20% down payment is the goal to shoot for in order to avoid PMI or MI– private mortgage insurance or mortgage insurance. Reality is, most people, just don’t have that, so they must contend with the necessary evil of paying for mortgage insurance in their house payment.

But is PMI/MI really all that bad? First, let’s look at some history of down payments.   In the early 1900’s, down payments were commonly 40%- 50% for conventional financing – wow!  Of course, a house back then, may have only cost $5,000 – so $2,500 doesn’t seem like that big of a deal, BUT when annual incomes were approximately  $600-$700/year, that made coming up with that money hard, maybe even impossible

To help stimulate the economy, in 1934, FHA (Federal Housing Administration) came along with an alternative to conventional’s large down payments – they offered a minimum down payment.  With it, they charged mortgage insurance on an annual basis (factored monthly into the payment) and also collected an amount upfront called the Upfront Mortgage Insurance Premium (UFMIP), which is financed into the loan.  Throughout the history of FHA, the required down payment, annual MI and UFMIP amounts have adjusted to FHA’s needs (government loan type).

In the late 1950’s, conventional financing wanted to get in the game and make housing more affordable, so in came Private Mortgage Insurance companies (PMI). This insurance, paid for by the buyer, helped lenders feel more comfortable with smaller down payments.

So what exactly does PMI/MI do? Unfortunately, it doesn’t do anything for you.  It is all about insuring the lender in case you default on your loan.  If the lender has to foreclose due to non-payment, they can fall back on this insurance to help cover some of their losses.

With conventional financing, there are certain coverage percentages which differ with PMI depending on your down payment amount and your credit score. If you use a first time buyer program, with PMI, you may even have a lower percentage, thus a lower PMI payment.

FHA’s annual amount for MI doesn’t vary on the credit score. If you put more than 5% down, you will have a lesser annual/monthly amount for your MI.  Even if you put 20% or more down, you WILL still have the upfront and the annual MI with FHA.

What about getting rid of the PMI/MI? This differs by program.  With FHA financing, you can’t get rid of the MI – it will be on your loan the entire term you have it.  Only caveat is if you start with 10% down, the MI will eventually drop off.

With conventional PMI, it will automatically go away when you reach 78% loan to value (LTV) of the original value (purchase price) of your home – or 22% equity. Fortunately, with PMI, you can be proactive and attempt to remove this sooner than that.  There are essentially two opportunities, but ultimately, the servicer of your loan (company you’re making payments to) will be the decision maker here on whether they allow this.

First, your LTV must be at 80% or less of the original value based on your amortization or actual payments you’ve made.

Or second, if you can show with a new appraisal that you have the necessary equity required by the servicer, you could request the servicer to drop the PMI.  Ultimately, cancelation is still up to the servicer.

So, the necessary evil isn’t really evil at all – it’s really a GREAT opportunity for you to buy a home without needing 20% down, without having to scrape and save every penny you earn. And, if you’re eligible, you could even get assistance for that down payment with one of the many first time/subsequent home buyer programs available in Minnesota!

End result: the necessary AWESOMENESS is that you can get into a home sooner than later due to this little necessary evil!

Need Money for Closing Costs?

Most of the first time buyer assistance programs require that the assistance you receive, for down payment and/or closing costs, is paid back. Usually it’s paid back over a period of time or the repayment of it is deferred until the house is sold or no longer your primary residence.  Either way, the entity providing the funds gets their money back to help the next home buyer in need.

MN Housing just announced a new grant program which doesn’t require any money to be paid back!  As with all MN Housing programs, there are eligibility requirements.  These vary depending on WHICH MN Housing program you use and there are three of them – Start Up, Step Up and MCC (Mortgage Credit Certificate).  The grant works with all three of their programs AND you can pair it WITH the assistance!

In any case, you still must meet guidelines set forth by the underlying loan type you are securing — FHA, VA, RD (Rural Development) or conventional. If you meet those guidelines, then we look to see if we can layer the loan type with the MN Housing program.

Generally speaking, they have income limits that your household must be under, and as with the underlying loan program, there are minimum credit score requirements. Being a first time home buyer is a pre-requisite for two of the three programs – Start Up and MCC.  And the definition of a first time home buyer is not having ownership interest in a principal residence in the last three years.

The grant is only available when using a conventional loan with your MN Housing program. It cannot be used with VA, FHA or RD.  The grant amount will differ depending on which guidelines your underlying loan is following – Fannie Mae or Freddie Mac.  Who are Fannie and Freddie you ask?  These are the agencies that provide the guidelines lenders follow for conventional financing.  Your lender will determine the best underlying loan for your needs and situation.

To be eligible for the grant, you must have annual qualifying income under $72,320. Qualifying income is the income your lender uses to determine your qualifications for your loan.  For instance, if you are the only one on the loan, but your spouse is not, then the qualifying income is just your income.  This limit is for the 11-county metro area, which encompasses Anoka, Carver, Chisago, Dakota, Hennepin, Isanti, Ramsey, Scott, Sherburne, Washington and Wright Counties.  Income limits are lower in the remaining MN counties.

If using Fannie Mae, the grant amount is a flat $1,500 to use toward your closing costs only.

If your lender determines Freddie Mac guidelines are your best fit, the grant will vary based on the loan amount you’re securing and qualifying income – (which still needs to be below the aforementioned limits).  The grant can be used for BOTH closing costs and down payment.  Minimally, you would be looking at ½% of the loan size, but you could be eligible for a larger grant if your income meets lower limits set for the program.  Any lender participating with MN Housing can give you further details.

As always, when working with a lender, make sure they offer these great programs with MN Housing and any other agencies to help you get into your house with as much assistance as possible. And who can say “no” to grant money!?!

Homebuyer Education that is an A+

Goodness – there is a lot of information available for homebuyers, especially for first time buyers. You can search online and find plenty of information, tips and opinions.  Your family, friends and co-workers are typically willing to give their advice too, not to mention all the books on the subject of home-buying.

With so much information from multiple sources, it can be a little overwhelming, not to mention daunting. There is a wonderful resource that we have in Minnesota that can help take the mystery out of buying your first home and give you the one-stop-shop of homeownership research.

It’s called Homestretch. The Minnesota Homeownership Center developed a required class for people who want to utilize first time buyer assistance programs.  This class, however, is not just for first time buyers.  It’s for ANYONE looking to buy a home.  And so much has changed in lending, that getting a refresher after being a homeowner for years isn’t a bad thing!

The class is eight hours long, but is well worth the time investment – not only for the education piece, but also it enables you, if eligible, to participate in many different assistance programs. Talking to your lender will help you determine the programs you might be eligible for.

Homestretch is taught in many locations which you can choose from and can be found by clicking their link on the right side of my blog. You can attend ANY class that’s convenient for you.  If you’re planning on doing any special assistance program, like Neighborhood LIFT or NSP, you will need to attend a HUD-approved Homestretch class.  Their website can direct you appropriately.  As of this writing, there are no more funds in the LIFT program.

During the class, you will learn about becoming a homeowner, how to prepare for this “move” financially, determine your comfort level for a house payment by completing a budget, learn about credit, different loan types, home inspections, the offer process and MUCH MORE! I know I sound like a commercial for Homestretch, but I truly believe in being as educated as possible about the BIGGEST purchase you will ever make.

The in-person class is really the way to go. Since there are other people in the same situation as you, others’ questions can help you learn more than you would from the manual you receive.  Typically, the class will have a few different presenters, possibly a loan officer, a Realtor or a home inspector, to name a few.  These experts can add more value to the printed material too since they know the ropes!

The Homestretch class does come with a cost and each agency that teaches it will charge a different amount ranging from $20 – $50 (typically per household). Also, there are classes taught in different languages, so if English isn’t your primary language, you may be able to find a live class that meets your needs.

But what if you don’t have time to share eight hours with new home-buying strangers? Then you may opt to take the Framework class which is the online version of Homestretch.  This probably won’t take you as long as the in-person class, but you will still learn the same information.  The fee for Framework is $75.  Depending on the program you end up using, as discussed with your lender, you may want to confirm Framework is an option over Homestretch.  Some programs do require the in-person class.

Regardless of what method of learning you choose, in-person or online, this class is the perfect “starting point” for your home-buying journey. It’s best taken prior to even starting your pre-approval process or shortly after meeting with your loan officer.

Being educated on what to expect, what questions to ask and things to avoid is priceless. Homestretch is definitely the way to go if you’re looking for the one-stop-shop for homebuyer education!