When you first decide you are ready to buy a home it’s tough understanding what steps are needed to get started. Having the right professionals to guide you and walk you each step of the process is crucial. Your Real Estate Agent should have a good idea of what steps are needed and who can help you through each phase. In this article, we will discuss the steps to getting pre-qualified for a home loan with a lender.
Something to Note:
Make sure to do your due diligence with lenders before
releasing any personal information over the phone or electronically. One of the many ways to verify a licensed
Loan Officer is to request their NMLS number and look it up at NMLS Consumer
Access where you can verify their name, company, and office
Step One – Speak with a Lender
This seems easy enough but if you are new to homebuying, you
may not know what questions to ask or how the first conversation will go. Here are some ideas and things the lender might
How long have you been renting/leasing?
What kind of monthly budget are you planning
Is this your first home purchase?
Are you self-employed or do you work for a
Are you married?
That first encounter with a lender is discussing basic
background to get to know you and better understanding how they can help you
with your financing. These questions all
serve a specific purpose in proposing the best loan program for you.
The FREE credit score provided through banking and/or online
sites is not an accurate representation for the FICO score pulled with a mortgage
lender. There are 2 types of credit
reports a lender can pull; hard FICO Pull & soft FICO Pull. Hard Pull credit reports will report a new
credit inquiry on your FICO report where a soft pull does not show as an
inquiry. Unless abused, typically a hard
pull for mortgage purposes does not have a substantial impact on your FICO
The soft pull report is for informational purposes and
typically cannot be used to make a true pre-qualification for a home loan.
A true pre-qualification for a home loan should include a
hard FICO pull so the lender can run the Automated Underwriting System (AUS) to
determine loan eligibility. The AUS
review is crucial because it reads the income, credit and assets against
underwriting guidelines to determine eligibility.
Step Two – Send your Lender Documents to review
Your lender may request initial documentation to complete a
pre-qualification review. The documents
include information that describe your income, assets and credit. It is NOT a requirement to send a lender
documents during the pre-qualification phase.
However, it is highly recommended to both save you time and money AND to
give credibility to your pre-qualification when submitting offers on homes.
Your initial documentation can reveal opportunities for
getting a better interest rate or qualifying for a higher loan. Below is a sample of some of the initial
documents a lender may request:
Last 2 years Tax Returns, W2 forms, and/or 1099
Last 30 days Pay Stubs
Social Security and/or Pension Award Letter(s)
Most recent bank statement(s)
2 forms of identification
DD 214 Member copy 4 (VA Loans)
Signed authorization to review credit
Most of the time, clients are working over the phone or
email. Just be sure you are sending
everything securely to your lender.
Financial institutions do everything in their power to protect your
information. Request a secure way to
send your documents if submitting electronically.
Step 3 – Review your Pre-Qualification
Your pre-qualification review should be a blueprint of your
loan program and product when you enter into a purchase contract to buy a
home. The pre-qualification serves as
credibility that you can secure the funds needed to buy a home from a
seller. The work put in upfront in this
phase is preparing the way for when you find your dream home!
Pre-qualifying can take as little as a day to as long as a
couple weeks depending on the client and/or sometimes the circumstances of the
review. No matter how long it takes,
preparation is key for the success of any home loan closed. Having the right team to support you in your
home search can ensure that success.
A good Lender or Loan Officer is willing to take the time to answer your questions and discuss the lending process. You do not need to commit to anything when you speak with a Loan Officer about your prospect of buying a home. If you feel pressured into commitment, hang up and call someone else for guidance or elect to meet with the Loan Officer in the office.
Many people have asked me recently how they should manage their home’s equity now that the housing market has stabilized. It’s a great question and one that signals signs of health and growth in the housing market. Here are 4 ways to manage the equity in your home.
Your home is like a bank where the value can be turned into
cash for what you do not owe on the original loan, within reason. Many of my clients are finding their home’s
value is a great vehicle to manage their monthly cash flow and payoff their
consumer debt such as credit cards or personal loans. Remember that the interest on credit cards is
not amortized to be “paid off” anytime soon and the interest you pay on
revolving debt and most personal loans is much higher.
Through a cash-out refinance on your first mortgage, you can take the equity and apply that money to paying off your debt. We recently closed a loan with this very scenario and the borrower is saving $1400 a month on their expenses by consolidating their credit card debt into a refinance. Their mortgage payment goes up, but their monthly cash flow goes down significantly. See below:
2. Home Improvements
Home improvements can do a lot for your home’s value in the
future, not to mention it’s resale value when you decide to upgrade or
right-size your home. You can access the equity in your home for home improvements
either through a cash-out refinance or Home Equity Line of Credit/Loan (HELOC). Both offer their advantages depending on your
goals. You can also use a Renovation
Loan through FHA’s 203k loan program or Conventional’s Homestyle loan
program. Check out my Blog
Post on the Renovation loans.
Some banks and credit unions will consider a HELOC for home
renovations at a greater loan-to-value (LTV).
For example, one institution goes up to 130% LTV for home improvements
with a General Contractor bid. Others
will go up to 100% LTV on a HELOC. But
you MUST read your loan terms.
HELOC’s are generally interest only payments for the first 10 years meaning you are not reducing any of the principle money owed. This is why a HELOC is not a good option for debt consolidation. You should have a strategy for paying off your HELOC or Equity Loan before signing the paperwork. This can make doing a simple cash-out refinance more attractive because the risk is less involved only making one house payment vs two!
3. Sell your home & Payoff Debt
You’re kidding right?
Why would I sell my home and buy another when I’d be paying more for the
house and a higher rate on my mortgage? 6
Reasons to Buy a Home
Great question! It’s because if you are paying a lot of consumer debt you can payoff that debt from the sale proceeds and still put a down payment on a new home. In the end, you can save on your overall monthly expenses and truly save that additional cash you’d otherwise be paying on debt. It’s an opportunity if you are contemplating buying a new home and don’t know how it will affect your monthly expenses considering the mortgage payment may be higher than what you are paying.
Take the image above as an example. This borrower can sell their home at market
value, take the equity and payoff $35k in consumer debt totaling $1,274 in
monthly minimum payments. They will
still have funds left over for a 5% down payment on a conventional loan and
save $454 a month overall with a new mortgage on a new home.
We can take it a step further and take the $983 they are saving through debt consolidation and apply that as a principle reduction on their mortgage every month. They will pay off their mortgage in less than 15 years and ultimately save over $80k on interest. Pair this with an Adjustable Rate Mortgage (ARM) product and you can understand the power of prepaying your mortgage. Mortgage qualifying is more than the interest rate but the planning for wealth in the future.
The last way to manage your home’s equity? Do nothing at all and enjoy the appreciated
gains. Just because I love German
Chocolate Cake doesn’t mean I eat it every day.
Sure, it’s not as much fun and you could do other things that aren’t
limited to this list. You can get
creative and start a business, invest in other real estate, make principle
reduction payments, or buy your vacation home.
Whatever you decide, just be smart in your decision and
planning processes. Get your own Homebot Report
my latest Blog Post on Homebot.
The sit & relax approach is having the confidence knowing you have
access to your home’s equity when you need it or when an opportunity arises. If you are interested in a FREE report on how
your Home Equity can be used, send me a message and we will discuss your
options! Thanks for reading.
A long time ago, before I ever worked in mortgage finance, I
moved 5 times in one year between apartments and friends homes. I finally landed living with my Grandparents
so I could finish school and afford my bills.
I struggled financially and was truly grateful for my Grandparents
taking me in. I finished school and
later moved out shortly thereafter. But
all those moves taught me something valuable; renting and moving are expensive.
Granted, the average family is not moving 5 times in a
year. In fact, they may move once every
year or two. While my expenses added up
much faster, it occurred to me that even the one move or continuing the rent
cycle adds up overtime both in dollars actually spent and missed opportunity
with rising interest rates and home value appreciation.
Renting a home can be more convenient for a number a reasons;
A Landlord takes care of major repairs, you are not committed to living there permanently,
and sometimes it will be less expensive in the short term. Yet, the same considerations for renting can
translate into homeownership becoming a better option for convenience.
As a homeowner, you are your own Landlord. You will need to maintain your home. But YOU maintain your home to YOUR standards, not sub-standards to save a couple bucks. YOU control the level of work done with repairs and maintenance. I have heard countless stories of how Landlords fixed a broken water heater or dishwasher with a used one as the replacement for the appliance to just give out on them a month later. Another story involved a leaking roof that the landlord did not fix properly which later created black mold issues in the home. While you are responsible for your home, the quality of life can be much better.
Rental Rates on the rise
According to an Inman article with CoreLogic data, rental rates increased 6.9% in 2018 in Phoenix and 3.1% Nationally due to job creation and limited supply for housing. Phoenix is listed as one of the top markets for cost of living affordability and economic growth. This means owning a home and/or buying a home in 2019 will still help you take advantage of an appreciating market when values increase.
The housing demand is noticed locally in the Phoenix market with many new home projects underway. That’s because both single-family homes and rentals are in such high demand for new families, growing families, college graduates, divorcees, and retirees. Between rising rents, right-sizing and job growth, people are looking to fix their monthly expenses while leveraging wealth creation.
Looking at the Numbers
Let’s dig deeper at the numbers. Take a 3 bed 2 bath single-family home valued
at $250,000 in a neighborhood. Rent is
$1,600 per month. Below are additional expenses:
Security Deposit: $500
Pet Deposit: $300 (if applicable)
First Month’s rent: $1,600
Moving: $1,500 – $3,000
Total: $3,900 –
Cost of Waiting
Your total cost of entry is nearly 75% of the down payment
needed to purchase a home. And, you “skip”
a payment when the mortgage comes due.
When you try buying that home in a year or two, you will likely pay more
for the home which will increase your cost of entry and the monthly payment due
to rising rates and appreciation on the home’s value. Appreciation occurs when the supply is lower
than the demand. Homes in this price
point are hot in today’s market. See
The chart above depicts the historical appreciation in Maricopa
County. The conclusion to consider is
how much more you will pay for every year you decide to wait. The appreciation of home values makes the
cost of entry higher. If rental rates
are themselves expected to increase, why wouldn’t home values increase? Remember, there is a supply and demand
Amortization is a way of spreading out the cost of
something. For housing, it means
payments of money owned/borrowed (principle) and the cost of money (interest).
Looking at amortization (principle payments) and
appreciation combined, you start to see how owning a home creates wealth. The cart below depicts how overtime the money
you are paying into a home works for you.
After year one, you would gain $15k in ownership. This combines the money paid toward your
principle and the equity gained. In year
two, that number doubles to $30k. Paying
$1,600 per month towards rent ($19,200 over 12-months) goes toward zero.
As a lender, it is obvious I am a proponent of homeownership. Afterall, it’s my business. I am not opposed to why someone will continue renting and in some cases, I may recommend that setup. However, I wouldn’t be doing my job if I didn’t take the time to explore the numbers and overall breakdown of how and why homeownership is a better solution, even if the payment is a little higher than renting for the short term.
Ultimately, any decision requires some emotional and rational thought process. If you can afford a rent payment that equates to a mortgage payment, you are truly missing out on opportunity, even if it’s for the short term.
When I first started as a Loan Officer, Down Payment
Assistance (DPA) was all the rage. Many
prospective Home Buyer’s were coming out of the recession with great income and
decent credit, but lacked the assets for a down payment. In addition, home prices were so low that
just about everyone could afford the monthly payments and the terms associated
Fast-forward to 2019, changes in DPA programs have altered
it’s allure and now it’s important to consider how using a DPA will impact your
financial future when purchasing your home.
In this post, we explore the various DPA programs, their requirements,
the monthly payments, and future considerations. It’s a lot of information, but well worth the
read if you are considering a home purchase in the near future.
*Loan parameters are based on Rates and terms as of 2/1/2019. Conventional Financing terms based on a 720 FICO score and the Fannie Mae Homeready Program with 3% down payment. Program terms and rates consider coverage variations prescribed by Fannie Mae Homeready, HFA Preferred, Home In Five, and Home Plus. FHA Financing terms based on a 660 FICO score. NMLS# 1074188 All Borrowers subject to credit qualifications. Not all borrowers will qualify as certain restrictions apply on all programs. The information contained in this material is not a guarantee to extend credit or lend. Terms & conditions are subject to change without notice.
What is a DPA &
what types are offered?
The DPA programs mentioned here are offered in Maricopa
County Arizona. They grant certain
percentages of the purchase price on a home in the form of a silent second lien
towards the down payment needed. Home in
Five offers special incentives for Teachers, First Responders, Veterans,
Military, and Nurses. Home Plus allows
additional funds as a down payment towards your purchase. Below is a brief list:
Home in Five Program
Home Plus Program
Pathway 2 Purchase
Neighborhood Stabilization Program (NSP) –
Through a respective City
Matthew Hensen Program (tied to NSP)
Chicanas Por La Casa
For the sake of time and popularity, we will discuss only
the Home in Five and Home Plus programs.
Home in Five
The Home in Five will grant up to 4% assistance to cover the
down payment and/or closing costs on your new home. The 4% is the max allowed provided you meet
the requirements for credit and qualify for the special incentive. There is a maximum income limit allowed of
$99,169 unless you are using the Fannie Mae HFA Preferred portion of the program
which is $69,100. The maximum
debt-to-income ratio allowed is 45%.
That means your total obligation (including your proposed house payment)
cannot exceed 45% of your gross income used to qualify for a mortgage loan.
Your assistance is calculated off the BASE loan amount after
a down payment would be applied. For
example, Buying a home at $275,000 with FHA at 3.5% down using this program,
the BASE loan amount is $265,375. If
your max assistance is 3%, the grant will be 3% of $265,375 or $7,961.25 as
your grant. You would still need
$1,663.75 for the remaining down payment which can be a gift or come from your
The grant is now considered a forgivable silent second
mortgage loan or lien. There are no
payments due on this second lien for 36 months.
You will be required to pay back the pro-rated portion of the silent
second loan if you payoff the original first mortgage before 36 months; i.e. a
refinance, selling your home, etc. After
the 36 months, the silent second lien drops and you no longer owe those funds.
Finally, the interest rate for the Home in Five program is
pre-determined for you regardless of your FICO score. The program administrator and master servicer
set the terms for the rate. As of
2/1/2019, the rate was 5.625% for the FHA and 5.75% for Conventional & VA.
Home Plus is very similar to Home in Five except the
debt-to-income ratio allows up to 50% and the down payment grant can go from 0%
– 5%. However, the more you receive, the
higher the pre-determined interest rate.
In addition, the income limit is much lower, $66,100. Both programs do NOT require you to be a
first-time buyer and you are allowed to own other property. You must occupy the home you are purchasing
as your primary residence within 60 days when using either program.
You may be wondering (or
not in which case skip to the next section) what is HFA Preferred? House Finance Authority is a designated
department of a State government agency in charge of administering and managing
grants for homeownership. Fannie Mae
& Freddie Mac give a special discount on mortgage insurance when you
originate your loan through a HFA.
Arizona’s HFA is represented through the Industrial Development
Authority of Maricopa County. True
homebuyer grants must come through government entities. To learn more click
here to be directed.
That’s Nice: How do
these programs affect my payment?
I am so happy you asked!
In fact, thank you for staying with me to this point.
Most of my borrowers discover they will be paying more per
month on their mortgage payment using a DPA program than if they had the
capacity to fund their own down payment.
It’s important to be educated to know your options and work with a
Lender who takes your best interest as their own. Many lenders shy away from discussing the
differences for fear of losing you as a client and potentially their referral
Let’s review using a FHA loan with the Home in Five and Home
Plus programs compared to using your own funds or a gift as a down payment
source. The purchase price is $275,000
and the down payment requirement is 3.5% or $9,625. This scenario is based on a 660 FICO without
the special incentive. I did not use the
special incentive in this case because not everyone will qualify for that
advantage. If you do, you will simply
get an additional 1% in assistance. See
There’s no free lunch
Most lenders will tell you to refinance this loan
later. If you’re buying a home getting
instant equity at the purchase, then this is a good strategy because ultimately
you will build value much faster. But
what if you don’t get that instant equity?
You are stuck paying that additional $166 for the next 36 months. That adds up over time, $8,080 in interest
with less money going towards principle.
Go back to the beginning when I described your grant proceeds on
$275,000, the total was $7,961.25.
Essentially, you are still paying for your down payment over the course
of 3 years. It’s a borrowed grant.
Here is a look at a conventional loan scenario taking into
consideration the HFA Preferred mortgage insurance rates and the Homeready
program. This is the same purchase price
at 3% down.
In this scenario, you’re paying $7,990 in additional
interest over 3 years and less towards your principle during that time.
Starting out with
I had a client recently hit a Homerun out of the park using
a DPA. Their home apprised $40,000
higher than the contract purchase price.
Even though they have a forgivable silent second mortgage, we are going
to refinance them this summer and lower their payment. They will have to pay back the grant, but it
comes out of the equity they already have.
They will be saving substantially each month and over the life of their
However, for many borrowers using a DPA, they may not get
that kind of sweet. It’s rare for that
kind of value to come in and it takes a great Realtor to make something like
that happen. You need to be aware that
you will start out in a negative equity position when you use this program
because of the silent second lien.
If you refinance or sell your home, you need to pay off your
home for at least to total of your mortgage liens. For example, take the same $275,000 house
using FHA. The total lien amount will be
$277,980 when you purchased the home at $275,000. For conventional, the total lien amount will
be $274,752, which is a little better, but nearly 100% loan-to-value
(LTV). My point to this is your
appreciating value of your home will take longer to realize if you want to
consider a refinance or selling your home for the shorter future. You must have some equity for a refinance to
The down payment on a home is not limited to have a large
saving account or waiting years to buy a home with 20% down. In fact, many borrowers have been savings all
along and don’t realize they have the resources available to purchase a home.
Your 401k through your employer is a solution. Most 401k plans allow you to borrow against
your plan up to 50% of the vested balance for any purpose. The money is not taxed and is paid back
through payroll deductions. Some plans
even allow the interest you pay on the loan to go back into your 401k or the
payments are made pre-tax. You will need
to check with you plan provider.
An IRA can be leveraged if you are a First-Time Homebuyer
purchasing your primary residence. Up to
$10,000 can be withdrawn without the penalty if you are withdrawing before you
turn 59 ½. You will still pay taxes on
the $10,000 distribution (if a traditional IRA or Roth IRA when the $10,000
exceeds your initial contribution).
Immediate family can also gift you the down payment to
purchase a home. Many times borrowers
let their family know their plans and it comes up that they can help contribute
to their future.
I want to use the DPA
There is absolutely nothing wrong with using the DPA
programs described here. In fact, if
this is the only option for purchasing your home, it is a good solution because
ultimately, you still build wealth and fix your overall monthly expenses for
the future. It is just important to
understand the differences and how it can affect your overall monthly payment
IF you have the capacity to qualify for a home loan without using these
programs. We have not turned anyone away
wanting to use these programs and will always make sure to do our best giving
borrowers access to homeownership.
If you made it this far, I thank you whole-heartedly. I have these conversations daily and wanted
to make a post about DPA’s for a while to help educate and explain the
basics. The decision to buy a home is
not something to take lightly and should be treated with attention to
detail. Fortunately, working with our
team, we will manage the details for you so all you need to think about it
which home you like best. Happy House
We run into a lot of interesting scenarios in the mortgage industry to help people get home loans. After a while, they blend together because trends come and go. However, this scenario was unique and challenging. We recently closed a mortgage loan for a high income earning client saving them from writing a $200k check to their ex-spouse.
Before we continue, I must point out that our client is not avoiding any due payments but instead following the advice of their financial adviser in the timing of payments. Without too much detail, a large sum had been paid out prior to this $280k described later on. We simply were attempting to help lesson the financial hit all at once with saving the borrower the $200k upfront. The borrower is fulfilling their roll as we speak.
Learning from the Past
This wasn’t our first rodeo with our borrower. A year earlier we worked together helping them purchase an investment property with 30% down. The credit score was 620 and to top it off, there were several late payments on their existing mortgage loan. You might ask, “why would a high income earning professional be late and have a low score?”. The answer: It was not their fault.
Life happens, and the borrower was in the middle of separating from their spouse, who was living in the home with the late mortgage payments. They made an agreement that the spouse would pay the mortgage. However, payments were missed, and it adversely affected our client’s credit in a big way, dropping his FICO score to 620. Our client of course brought the mortgage current and managed the payments moving forward.
We finalized the loan on the investment property but spent a lot of time sorting out details and collecting all the necessary paperwork for their loan. Some loan approvals can be messy, but they were approved and now have a great income producing property!
Fast forward to 2018, our client was interested in purchasing a new home. From our last experience, we both knew everything had to be right this time around. We are in a seller’s market and the last thing we needed was to waste time and lose money.
It’s always serious business when buying a home. In this case, we were preparing for a purchase of $920k and working to make the payments affordable while building a loan application around guidelines favorable to the client for an approval.
We collected our client’s financials, reviewed their credit and discussed our strategy. For everything to work, the divorce had to be finalized. Last year, the couple was in mediation working out the details. They had just filed their petition with the court around the time we began the pre-qualification for the new home.
In addition, there was a lingering item on credit holding back our client. He had a high FICO of 780, but his mid-score was showing 650. We referred him to our credit expert and for $100, the negative item was removed, and his score jumped to 750. Beautiful! It should be noted the negative item was not his and he had proof to show it. We just helped him remove it faster.
So far, we are moving smoothly recalling last year and the issues we struggled with. Our homework was paying off and we were ready to start shopping for homes. We were moving along so well; our client went under contract and we agreed to push for closing before the actual close of escrow (COE). This is not something we promise in scenarios as complex as this, but we felt confident in the opportunity.
Understanding how loan guidelines work, it’s important to have your plan for getting an approval defined from the start. You should also maintain a back up plan if the first one doesn’t work. We had a plan B and used it.
Our client’s jumbo loan was not going well because the investor had a pass/fail approach to their credit. Remember those mortgage late payments from last year? Well, the investor didn’t like the fact that they occurred within the last 24 months. The kicker was, we provided over 2 years of financial reserves and accounted for their requirements that the reserves be 70% of the balance to account for time and the vesting style of those funds. In addition, our debt-to-income ratios were well within limits.
Plan B was to split the mortgage into a first and second. Our first mortgage needed to be $453,100 to conform to Fannie Mae loan limits (for 2018) and we financed a portion of the down payment in the form of a second mortgage at $236,900. Our client came in with $230,000, 25% of $920k, their original commitment. The “plan A” mortgage payment was roughly $120 less then the plan B solution, but the second mortgage could be paid off sooner with no penalty effectively lowering their housing expense without refinancing. For borrowers with high incomes, this solution can be favorable as a low maintenance solution.
The Solution & Result
The jumbo loan idea was scrapped to give us a chance of closing before the intended COE. We turned around a loan approval for the first mortgage at $453,100 within 24 hours and submitted for the second mortgage approval in that same time. After another 24 hours, we received the second mortgage approval with some conditions.
One of the conditions for the final approval, issued by the second mortgage firm, required proof that our borrower completed the lump sum alimony payment to his ex-spouse as described in the divorce decree. What made this condition problematic was the divorce decree did not describe how or by when the payment needed to be completed. It was one sentence with no clear direction.
a. (Client) shall pay to (ex-spouse) the sum of Two Hundred Eighty Thousand Dollars ($280,000) as a non-taxable equalization payment for the division of property.
Our underwriting team (first mortgage at All Western Mortgage) did not require this to be paid prior to the loan approval. In most cases, alimony payments & child support are added to a borrower’s monthly debt obligations because there is a clearly defined payment and date for the payment to be received. However, this kind of payment is treated as a contingent liability and is NOT required to count in the borrower’s recurring debt obligations per Fannie Mae guidelines. See below:
Writing a check for the remaining $200k he owned, upfront, was something he was not prepared for, especially since the funds were tied up in specific stocks which had penalties if liquidated too soon.
Fortunately, our client already paid out $80k towards this balance owed ($280k) in the last 45 days. They were clearly paying to chip away at this total. Anytime a liability is less than 10 months away from being paid off, the lender can choose to omit the debt/liability from the application if the debt does not adversely affect the borrower’s ability to make their mortgage payment.
Based on our client’s assets, their payments towards the $280k owed to their ex-spouse, and their reserves, we presented the case that the remaining $200k will be paid off in less than 10 months, given the rate the borrower paid thus far and other factors. Our client was approved with the clear-to-close on the second mortgage because of this presentation.
The client was grateful and happy that everything worked out. They were phenomenal despite our challenges. Not to say it wasn’t stressful. It’s worthy to note that our client’s Realtor, Liz Lovett, was fantastic and amazing to work with and my Processor played a huge roll in the approval.
Most lenders want the quick and easy loan to close. Despite the difficulty and challenges, I am grateful for the opportunity for growth it presented. But most importantly, I am humbly appreciative of the Client, their Realtor, and my Processing team for trusting & helping us through this file.
Many new products and programs have come down into our product offerings at All Western Mortgage. With some of the new products we now offer, we can approach our clients with better solutions for their home mortgage when they are buying a home. In this blog, I go over a unique product called a 2-1 Buy Down.
2-1 Buy Down for FHA and Conventional Purchase Loans
The name of this product sounds like one of those loans from pre-2008 but is far from that family of products. A 2-1 Buy Down allows a borrower to lock an interest rate 2% below the Note rate for the first year, then the rate increases by 1% the second year. Once years one and two are complete, the interest rate becomes the true Note rate that was locked. This is a 30 year “fixed” rate loan. See below for a quick example:
Initial Note rate locked 5.875%
1st year interest rate 3.875%
2nd year interest rate 4.875%
Sample Scenario Conventional Loan scenario
Purchase Price: $350,000
Loan Amount: $332,500 (5% down payment)
Principle & Interest Payments:
$1,563.54 @ 3.875%
$1,759.62 @ 4.875%
$1,966.86 @ 5.878%
Summary: What You can do
The savings on the payment between year one and year three is nearly $400 a month. Then it comes down to $200 a month. A borrower must qualify on the actual Note rate, which in this example is 5.875%. But getting away with a lower monthly payment is not why someone will use this product. In fact, if this is your motive, I would not recommend this. The advantage of this product allows a borrower to pay that “savings” toward reducing the principle of the loan or money borrowed. Come year three, the borrower will want to refinance into a new mortgage to eliminate the mortgage insurance. Between the equity appreciation and reduced principle on the loan, they will eliminate mortgage insurance on the new appraised value.
See the example of the equity gained and built:
$400-savings year one x 12 months = $4,800 additional principle reduction year one
$200-savings year two x 12 months = $2,400 additional principle reduction year two
Total additional Principle Reduction first 2 years: $7,200
Estimated Equity Appreciation by year three at 3% – 4% appreciation: $30k – $40k
Total principle reduction from P&I payments first 2 years: $11,200
Down Payment when purchased $17,500
Grand total: $65k – 75k Equity built, earned, & paid
Why this is helpful
Remember you must have 20% equity to refinance without paying any kind of mortgage insurance on a conventional loan. With the original purchase price at $350,000, a 20% down payment would mean $70,000. In 2 years, using a 2-1 Buy Down, you can leverage the lower initial rate to make your regular mortgage payment, applying funds to reduce the principle owned, and refinance into a lower payment by eliminating the mortgage insurance on the loan. If this were FHA, the same idea applies. The Note rate may be higher than today’s rates but remember we cannot predict the future and it’s possible the note rate is the same, lower, or higher than the market down the road.
With interest rates on the rise, I believe consumers should look at products that give them better overall value. You can plan your financial future a little easier with something like this and prepare your mortgage payment with more clarity with a product like the 2-1 Buy Down. Request a customized review for your purchase plans before committing to this program.
If you’re like me, you maybe heard the song “Should I stay or Should I Go” from the Netflix series Stranger Things and felt cool reflecting 1980’s nostalgia. It can feel like late 2000’s nostalgia with the housing market; home values and interest rates are on the rise with a looming recession in a year or so. It begs the question, “Should I stay, or Should I Go?”. Except, darling is your house, not your girlfriend.
It’s a normal market
My clients lately have expressed fear with buying now and have equated the sellers’ market we are in with the 2008 recession and all the elements that led up to the financial crisis. What I have observed is most of these concerns have come from first-time buyers. Their normal was the housing crisis and seeing homes sell for next to nothing. They watched their friends and family either buy homes or get into the real estate or mortgage industries and make big gains. Those days of slinging homes and doing it on closeout price and loan terms are behind us.
Enter the new housing market where the decision to buy a home is still a great one, but it will take both work and additional considerations for your future. With interest rates on the rise, the decision to buy now includes discerning your future employment or business outlook. Should you buy the $600,000 home or be prudent and stick with the $400,000 home. My clients are wondering what to do and how far they should stretch their budgets for buying a home even more so now because higher rates mean higher payments and a normal market means sustainable home value appreciation, not the insane gains of the last 10 years (which have been awesome along the way).
I own my home
If you own a home now it’s difficult to part ways because of one thing; it was such a great deal! You likely bought your home when the rates were averaging 3.875% – 4.625% and got in when the value was 12% – 18% below market value. After a few years, you’ve realized great gains on the value and locked in low payment terms. If you were to sell and buy now, you will likely pay more for the same size and style of home. So why would anyone still sell their home in this market?
Many reasons come to mind for selling or staying in your home, but let’s take a look at a couple scenarios dealing with just finances.
You might consider selling if you have a lot of consumer debt and want out. If that’s the case, I highly recommend speaking with one of our preferred Real Estate partners. We recently helped a client rebuild their credit by selling their home and paying off all their debt. It wasn’t just a $10,000 credit card balance but a good $35,000 in debt. The had plenty of equity from the sale to pay off debt, make a down payment, and put some cash away for their rainy day or emergency fund. In the end, they still saved on their monthly cash flow, even with a slightly higher mortgage payment because they eliminated those monthly minimum payments with high interest rates.
Owing the IRS is no joke. Your home’s equity can pay that debt. Be mindful and understand I am not advocating only selling your home. Banks and Credit Unions are promoting Home Equity Line of Credit (HELOC) loans and Home Equity Loans because borrowing against your home is still better than borrowing unsecured debt with high rates. Borrowing against your home could mean a lower interest rate and terms that make your overall payment affordable, all backed by your home.
I keep hearing recession – What happens to my Equity in a recession?
Truthfully, I do not have a crystal ball on this question. But, I can give you something to consider and keep in mind. Our 2008 recession heavily affected home values because of aggressive mortgage terms people could not afford. The result was a massive wave of foreclosures and short sales in the market which brought home values down significantly. Think about it, if the demand and affordability for a product drops, what does a business do to sell their glut of inventory? They lower prices, take their losses, and move on. That’s essentially what the banks did.
It wasn’t always pretty, and many families were displaced and often lied to. The past is behind us and we can learn from it. That’s why it’s not expected that home values will have a catastrophic drop as they did in 2008. Underwriting criteria for home loans tightened up and forced banks to look at income with scrutiny. If you have variable income or are self-employed and bought a home, you know what I am talking about. Learn more about Self-Employed Borrowers – Income Qualifying.
A recession will have some down turn in your home’s value, but remember, you’ve gained equity today. You’ll either not gain equity during the recession for that year or drop down to the value at which you purchased your home. Some values may dip slightly lower, but it’s not expected that the masses will experience the 40% – 75% drop they encountered in 2008 – 2011. The regulations and guidelines we use to underwrite mortgage loans were implemented to hedge against housing repeating what happened in 2008. Check out my post Housing Strong going into 2019.
I’m still reading – What if I’m a buyer?
For buyer’s, great news! It’s still a good time to buy! I feel like a broken record and sometimes too salesy, but I maintain and believe in it. The trends point to a stable housing market and steady appreciation gains all while interest rates maintaining their historical lows. Yes! A rate at 5 -5.5% is still considered a low rate. Even for investment properties, rates are below 6% making it attractive to buy and hold properties for rental income and equity appreciation. Rental rates are increasing 3%-4% per year and the demand for housing (buying, selling or renting) has only gotten stronger.
If you are a first-time homebuyer or seasoned homebuyer, you have a lot to look forward too in buying a home in today’s market. Read my latest post 6 Reasons to Buy a Home.
Finally, the end of this post!
If you’ve made it this far, I both applaud you and sincerely thank you. I’ve wanted to write about this topic and honestly, I could go on even more. It’s an exciting time for the mortgage industry because clients want information about their home’s equity and how to use it to make a better lifestyle for their families. Should you stay, or should you go just depends on what you hope to accomplish with the results.
If you own your home and want ideas about selling, refinancing, or renting your home, read my post Homebot: Mortgage Reports Just for You and set up your monthly mortgage digest. There, you will get real data and information about your home in our current market.
It’s no secret that people are turning to their smartphones and technology to guide them with information and decisions. The Real Estate industry is littered with technology to give you the most updated data feeds on the housing market and your home’s value. But what about technology tailored for your actual mortgage and the ways to build cash flow or save on interest?
Meet Homebot, a new sophisticated service we are providing to all our clients at no cost who have completed a mortgage loan with us. This service allows our clients to see their potential equity and show them what a possible refinance looks like in the future. It also tells clients what their home might rent for on popular sites like Airbnb.com and VRBO.com. It’s a handy update our clients will receive once a month.
Sound like something you would like? Awesome! You can subscribe to these updates on your home at no cost. Even better is you share it with your family and friends. Click Here!
Why would I use this?
The question most people ask is “why do I need this”? Everyday I discuss the benefits of home ownership and how a home’s equity can improve monthly cash flow or open the opportunity to pay off debt or start a business. A home is a vehicle in addition to a place to live, that has helped many of my clients realize a tremendous amount of savings on interest and building wealth. One of my clients recently paid off their debt selling their home and had plenty of equity left over for a down payment on a new home. There are many strategies to using your home’s equity. Homebot can give you ideas and solutions.
Homebot is a tool that empowers clients with detailed information about their mortgage and not a guesstimate as to their home’s value but real data. Data is pulled from recent sales and rental rates (in a given area) and presented in an interactive way. You can also plan and estimate how consistent principle reduction payments will save you on interest and pay your mortgage off sooner.
What if I am Buying a Home?
Great news! Homebot is a great tool for Buyers wanting to find homes meeting their budget. The Buyer features let’s you locate homes and get a sense of price p/sq ft and homes that are available at your price point. It’s a good tool if you are relocating and compliments the work your Realtor does on your behalf. It does not replace your Real Estate agent, but gives Buyers an opportunity to see the data for the area from a Birdseye view. Contact me directly for more on how to set this up.
All of this is FREE and doesn’t cost you a thing. If you’re already a client, you will receive your free report once a month starting in the next couple weeks. It’s my way of continuing to say Thank You for trusting me with your family’s home. Enjoy!
In a Seller’s market, inventory of homes for sale is low with the demand for housing high. Buyers often find themselves taking a long time to find their perfect home and most of the time, settle on a place due to convenience. I firmly believe that in our modern world, you shouldn’t need to “settle” for anything. Renovation loans can help you create the perfect home you want.
There are two main types of renovation loans. The Homestyle renovation loan is a conventional product while the 203k renovation loan is the FHA product. Both are very similar in what you can and cannot include.
At the basic level, you can do anything from a facelift or façade rehab to adding square footage or even a garage. Remodel a kitchen, bathroom, living room, flooring, paint, windows, you name it, it can get done. Adding a pool and/or an outdoor BBQ can only be done with the conventional product. Provided you can qualify for the loan, you can use your imagination for your project. Check out a before and after of this bathroom.
Photo Courtesy of NXS Remodeling
What is the down payment?
You might be surprised to find out the minimum down payment requirement is no different that a typical FHA or conventional loan. You’ll need 3.5% of the total cost of the home plus the project on FHA and 5% for conventional. See the example below:
Conventional Loan Homestyle Renovation
Purchase Price: $300,000
Renovation Budget: $50,000
Total cost: $350,000 X 5%
Down Payment needed: $17,500
How do you qualify for the loan?
Qualifying for the renovation program is no different than qualifying for a traditional loan. How you shop for a home may differ because you cannot max out your budget on the purchase of the home. But remember, in a Seller’s market, you now open more possibilities with homes if you know you intend to put your own personal touches into the home after the sale. More on this concept in another Blog Post.
What’s the catch?
There are a couple requirements you must consider. Virtually any home can qualify for FHA or Conventional financing through this program. Missing electrical, old plumbing, holes in walls, crumbling stucco? YES, it can be done with this program. But, there is no “self-help” allowed which means you will need a Contractor who is licensed, bonded, & insured. They can be either a General Contractor or Sub-Contractor, depending on the scope of work.
It’s very important to speak with a Loan Officer prior to committing to this loan program. There are many moving pieces and the lender, Realtor, and Contractor should be on the same page. Don’t worry, that’s our job! But it helps to have these professions lined up prior to making an offer.
How do I get started?
This program is not just limited to purchases. You can refinance your existing home using this program if you are tight on equity for a HELOC or if you are in the middle of a gut job and need to fix your place ASAP. This introduction to a renovation loan might be your solution for creating the perfect home vs settling because you had no choice. Give us a call today for a free review to see if this is something for you.
A recent headline in California suggested that home purchases are slowing down and values are expected to crumble soon. You can read the article here. This quite simply is not true and while California has been a predictor for the housing markets in the past, there are new regulations and conditions which determine the strength of overall housing going into 2019.
A first-time Buyer considering a home purchase in 2019 might fear a recession in the next couple years. Given that most of these buyers were teenagers during the 2008 crisis, it’s expected there is hesitation. I can promise a recession at some point, but it won’t be because of housing. We must remember that the 2008 crisis was due in large part to predatory lending practices and inflated home values, much of which was not regulated.
Fast forward to our market today, housing remains strong with low inventory and a high demand. Check out 6 reasons to buy a home for additional insights. Remember that jobs, inflation, and consumer consumption drive the market and determine how the economy trends. Housing is predicated on these core areas and the data suggest a strong outlook in 2019.
Most people do not realize interest rates drive spending and the overall economy. If you can borrower money cheap, you have more opportunities for investing with a higher return. Borrow money at a higher than average rate, your margin is less. Interest rates for housing have gone up, but it is still less than the 30-year average at 7%. Check out the rates for home loans in 1985.
While home prices have increased since this time, so has the appreciation factor for owning a home. In the Phoenix market, appreciation is consistent at 4% – 6% a year. Can this slow down? Yes, and expect appreciation to stabilize to a normal level in 2019 to a 2% – 4% level. A home’s appreciation will depend on the kind of home purchased. Consider square footage, amenities, location, year built, renovations, livability, etc. All these factors influence a Homebuyer’s decision to buy a home. Less homes on the market means more opportunities to sell your home at a higher price. But why are there less homes on the market?
Remember that jobs influence a decision to own a home. What kind of stable jobs are out there in the economy and how are people spending their money? Consumers by nature want to save monthly on their expenses and plan for the unforeseen so they do not lose everything they worked for.
Homes bought over the last 10 years were purchased at super low rates (some at 3.25% on a 30-year fixed mortgage) and close-out prices. It’s tough to walk away from an 1,800 square foot home with a $800 a month mortgage payment.
Affordability has Changed
Inflation drives the price of goods and services. The recession of 2008 taught a lot of first-time and seasoned homebuyers not to overleverage themselves with debt or risky spending. Most people watch what they are spending and as prices go up, spending curbs and goes down. Owning a home fixes a lot of monthly expenses and creates stability therefore enabling consumers to afford the things and activities they like.
That’s where the affordability factor comes in. With home prices and interest rates going up, the cost to own is much higher. The P&I on a $200,000 30-year fixed loan at 3.875% in 2012 was $940.47. Today, the P&I on the same loan but at 4.875% is $1,058.42, over $100 higher per month. Factor that property taxes have increased 2% – 4% during that time, you can see how the differences add up.
The average home price in Maricopa County, AZ is $275,000 making the affordability income to qualify for a home loan at that price point almost $65,000 per year. Yet, the appreciation gain on this home is projected over $25,000 in the next 5 years. That’s roughly 3.4% appreciation per year compounding itself over 5 years. Even if there is a recession and home values slow or drop slightly, your appreciation gain now hedges you from going underwater.
When home sales seem to be falling, remember that inventory is low and affording a home requires more income than the last 10 years. We are in a stable and normal housing market compared to before the recession and after the recovery.
Source: MBS Highway
Should I sell my Home?
This is a question I get often when helping clients pre-qualify for a new mortgage loan. The answer really depends on your goals. Are you paying off debt? Do you want to be closer to town? Are you becoming an empty-nester? Do you need more space because the family grew? Do you just want to be in a new place? All are valid questions. The timing is ripe and the advantage to buying a home now or in the next year are still in your favor.
It seems like I am in favor of homebuying because my business is predicated on originating home loans. There is a bias there that I admit. However, the data is reasonable and observing the day-to-day activities in the market tell me we’ve entered a new era in housing that will last well into the next 10 years because the demand for owning housing holds in favor the weight of consumer spending, inflation and jobs. A lot of people are moving out of California because on the cost of living, creating a strong demand for housing in Arizona.