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Using your Home’s Equity | Managing Cash Flow & Paying Down your Mortgage

The COVID-19 pandemic has raised a lot of familiar questions about the economic outlook, interest rates, and home values for most of my clients.  Clients want to know how they can save on their monthly cash flow (not just mortgage payment), if interest rates are low enough for them, or how they can shorten the term of their mortgage loan.  Check out my past post about 4 ways to manage your home’s equity.  While all these ideas are good for Homeowners, deciding what makes sense can be overwhelming and during this time, some Homeowner’s face uncertainties with their income.  This article discusses monthly cash flow, using equity to consolidate consumer debt or point number one from my previous article.

Improving your monthly expenses will do more for you long term than the one-time economic impact payments most of us received through the CARES Act.  My recommendation for everyone is to either:

  1.  Invest in yourself by saving this money OR
  2.  Paydown or pay off debt with this money 

But paying off maybe one credit card might add an extra $35 – $55 a month to your cash flow.  Not enough to make an impact encouraging you to save monthly or enough to give you a real sense of security. 

Your home’s equity may be the solution for monthly savings.  Consider this, you owe $215,000 on your home that you purchased in 2015 for $250,000 and the value has appreciated on average 4% per year since that time.  Your Home’s value might be $305,000.  You can do a cash out refinance up to 80% Loan-to-value (LTV).  Here is the math and the appreciation chart:

Home Purchased May 2015 for $250,000 with 5% down

May 2020 Loan Balance roughly $215,000

Estimated max Home Value May 2020 $305,000

Max LTV at 80% of $305,000 (max loan amount) $244,000

Estimated cash out from refinance: $25,000

Most homeowners have credit card debt, car payments, IRS debt, student loan payments or installment loans (personal unsecured debt).  Assume this scenario has $25,000 in outstanding debt.  With high interest rates on credit cards, $29k in balances can add up to range $500 – $800 per month in payments.  Use the equity from your home and save on your total overall monthly payments:

Existing PITI payment based on principle balance owed of $217,272 with home purchased May 2015, for $250,000 with 5% down on a 30 year conventional loan at 4.375% fixed, amortized P&I payments to principle owed May 2020.  Proposed PITI payment based on loan amount $244,000 80% LTV new 30 year fixed conventional loan at 4.375%.  Rates do NOT reflect a FICO score when determining rate eligibility.  Sample provided for illustration purposes ONLY as a side-by-side comparison.  Actual loan terms, qualification terms and conditions may not be available at time of application and are subject to change.  5/19/2020.

The scenario above demonstrates the effect of using your home’s equity to consolidate debt and preserve monthly cash flow.  The savings overall is $758 per month in this sample.  This scenario shows a net positive effect of adding over $700 per month to your cash flow or in another sense, “paying” you over $700 per month since you have now eliminated those payments.  Not to mention “skipping” the mortgage payment at least one month.  A homeowner could take advantage of a significant boost to their saving account. 

Homeowners who are savvy in their financing can turn that savings around by applying it as principle reduction or setting the cash aside for a rainy day or reserve fund.  Below is an illustration of how that savings applied as principle reduction against your mortgage would not only save interest, but shorten the loan term overall:

The amortization gained is a critical resource to consider in this chart.  It is telling you that you gain nearly $128k (this scenario) by making consistent principle reduction payments on your home.  That gain represents the interest you are not paying on your mortgage giving you a “gain” in your equity. 

After that 14 years of paying additional principle, if you decide to sell your home, you net $388k in the sale of your home vs an estimated $260k if you make regular payments on the $244,000 (consolidating $25k of debt).  This is using the Forecasted appreciation model above (conservative estimate) vs the Historical. 

Most borrowers do not like the idea of consolidating debt into their mortgage because they feel they are dragging their debt along.  But, if you consider the additional savings for principle reduction towards your mortgage, or even just a portion of that savings (not to mention the appreciated value factor on your home), you gain more than enough in the long run to justify debt consolidation into your mortgage.  The additional payment is an adjustment to a way of thinking they are positive appreciating payments vs negative depreciating payments.  Remember, you were in the habit of paying it before the consolidation, now you are just allocating it in your favor.

Outside of using this savings for your mortgage, you have other options like putting the cash away for retirement in an IRA or general savings, increasing your 401k contribution or starting a college fund for your kids.  Either way, it is nice to have options to better your financial future.  I recommend to all my clients to maintain a minimum 3-month reserve on all expenses, then start using the savings to build wealth.  You should work with Financial Advisors and Mortgage Professionals who help you manage your money for your goals and who will stick with you in your planning.  Your home is too big an investment to risk not working with the right people.

The information contained in this post is meant for illustration purposes ONLY and does not reflect a FICO score or APR analysis.  Content is for demonstrating a general effect with using home equity and a cash our refinance product/program.  Actual terms and conditions may vary and may not be available to all borrowers or at time of application.  It is recommended borrowers seek the advice or their loan officer or reach out to the author of this post directly.

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Mortgage Forbearance: What you should know

The recent COVID-19 crisis has been a constantly evolving issue in the financial services industry including mortgage banking.  Much discussion has shifted from lenders being at capacity to offer low rates to how the FEDs buyback program and Mortgage Forbearance are hurting interest rates and obtaining credit for housing.  Below are some things to consider before taking a Mortgage Forbearance.

Please Note: Homeowners who need access to a forbearance should be able to obtain it.  This summary is meant to encourage Homeowners to consider their options prior taking a forbearance.  A mortgage forbearance can have serious financial implications if considerations are not reviewed responsibly.

What is a Mortgage Forbearance?

A mortgage forbearance is a kind of payment deferral where your mortgage payment is put on hold until a later date.  When that later date occurs, the Homeowner is responsible for resuming their mortgage payment.  It can help stall the process of foreclosure on the home so the Homeowner can attempt to get back on their feet financially, allowing them to keep their home. 

Recent action by the Federal Housing Finance Authority (FHFA) is requiring mortgage servicers to allow mortgage forbearance for those borrowers affected by COVID-19 issues such as job loss, loss of income, contracting the virus, death of the primary wage earner due to COVID-19, etc.  You do not have to had contracted the virus to attest for a forbearance.  Additional information is available here from FHFA

Will a forbearance affect my credit or will I be charged late fees?

The FHFA has instructed mortgage servicers that consumers’ credit should not be affected if a forbearance is granted and that late fees or penalties are to be waived in that event.  However, we have already seen credit reports reflecting “forbearance” under a borrower’s mortgage loan and they were marked 30 days late on their payment. Banks are reporting and allowed to show “Forbearance” under the mortgage account if actively in this status.  While this consumer could make a case for the forbearance and late mark to be removed, they will most likely go through many challenges before it is removed IF the servicer is willing to comply. 

Can I get a new mortgage loan if I have a Forbearance?

Not really and likely No for now. This includes refinances and is evolving day-by-day. Banks may introduce overlays, or additional requirements in the future, before you can successfully close on a new home loan if you have a forbearance.  For now, banks are NOT allowing new home loans with a current Forbearance showing on credit. In addition, it is possible that as more Homeowners use Forbearance, Fannie Mae, Freddie Mac, and HUD may update their guidelines to include seasoning periods or specific requirements for borrowers who have a Forbearance on their credit.

Will it be more difficult to get a mortgage loan if I do NOT have a Forbearance?

During times of recession, lending guidelines (in general) condense to ensure qualified individuals can make their mortgage payments on time.  The ability to repay a mortgage loan focuses on income, credit, and assets of a borrower.  All three areas must meet qualifying guidelines.  Obtaining a mortgage loan depends on the borrower circumstances.  If a borrower has a good stable work history of receiving the same income consistently and pays on time, the borrower should be able to qualify.  Again, this depends on the bigger picture the borrower is presenting for a home loan.

What does a forbearance payment plan look like?

  • Lump Sum – Some plans may require the full lump sum of deferred payments due all at once.  If your total mortgage payment is $2,000 per month (includes PITI) and you defer for 6 months, you will have $12,000 due at the end of the deferral.  Remember, the servicer is paying out the interest due to investors and paying out the Property Tax and Insurance premiums when due.  The servicer wants to be whole again, especially if they are borrowing funds to meet these obligations.  This is the most common and likely plan the servicers will use.
  • End of the Loan – Other plans may put the balance owed at end of your loan term, being added to the principle owed on your home loan.  You risk losing any appreciation gains with this option, especially if you just purchased your home. This option is more like a loan modification. Anticipate needing to show hardship for this type of plan. For now, how this plays out is still yet to be determined.

What if I want to hold my mortgage payments for 6 months and save the money?

Many Homeowners have considered holding their mortgage payments aside for the forbearance time to build up a reserve fund in case they lose their income.  Every situation is a case-by-case as there is no litmus test to say one thing or another.  However, consider that your interest rate on your checking or saving account is next to nothing compared to the interest you pay on your mortgage.  The money sitting in saving accounts that would have been made for the mortgage payment does not earn enough to have the money sitting there. 

A Homeowner who may lose their income and wants to have some relief so they can cover everyday expenses like groceries or utilities can make a good case for the need to have forbearance.  But, there are still other solutions.

What are some other solutions to a forbearance?

  • 401k & IRA Accounts – The IRS has put special waivers in place for withdrawing from your 401k or IRA for COVID -19 hardships such as waiving the 10% penalty on IRAs and allowing for additional loans or higher loan amounts against a 401k.  Speak with your HR representative about your 401k options or your Financial Advisor about IRA options
  • Refinance your existing mortgage – It may seem an obvious solution given my profession, but a rate/term refinance or cash out refinance can add to your monthly cash flow and reserves if you are still employed.  Even if you are furloughed during this time, but have savings, you could be eligible for a home loan and refinance.  Many of my clients have used this solution.
  • Skipping 2 months’ payments – Since you are refinancing your home loan, the payoff of the old loan serves as your mortgage payment.  Instead of making your payment, we can work so your loan closes before it is due.  Interest must be earned on a home loan before it can be collected.  So, say you are closing this month, April.  You let the payoff serve as your April payment, May must be earned interest by the bank (no payment due), your first payment is due June 1st.  Plus, you can take a small amount of cash out when doing a rate/term refinance (usually less than a percentage of the loan, no more than $2,000).  If you have a mortgage payment of $2,000, skipping 2 payments and taking the potential max cash back, you have $6,000 added to your saving account.  Finally, don’t forget any added monthly savings you gained from your refinance.
  • Cash out Refinance/Debt Consolidation – The Economic Impact Payments (EIP) are great for helping consumers and Homeowners.  I pray people choose to save the funds or pay their obligations.  But remember, this is one-time.  Using your home’s equity and taking cash out on a refinance can potentially help you save hundreds per month by reducing or eliminating unsecured consumer debt.  That is a savings that adds hundreds every month to your cash flow.

Summary

The news and guidelines continue to evolve during this unprecedented time.  Despite the abrupt slow down in the economy, housing is expected to remain strong and values are expected to continue appreciating.  The demand for housing is strong all around.  Interest rates will fluctuate between now and the next few months.  But they are remaining at all time lows.  There will be more opportunity for housing, especially with lower rates on the horizon. 

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Our New Office In The North Phoenix Area

On February 27, 2020 we celebrated the Ribbon Cutting for our new office in the North Phoenix Area. The support of the local Anthem Area Chamber of Commerce was instrumental in this endeavor and continues to be a staple for additional growth.

The evening was highlighted by the local business community coming out to support All Western Mortgage and with special recognition from Congresswomen Debbie Lesko, our representative. I am ever grateful for the local community, my All Western Mortgage family, the Chamber of Commerce and most especially my family for their support and encouragement.

Here is to this exciting venture!

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Mortgage Insurance: The Basics

Mortgage Insurance generally has a negative undertone when I discuss financing with clients.  Most new homebuyers pay mortgage insurance in some form, either monthly, as a single-premium, or as lender-paid.  Unless you are qualifying as a conventional loan with 20% down or are a VA borrower, you will pay mortgage insurance.  But how you pay it can be an advantage, saving you money in both the short term and long term.  If you must pay mortgage insurance, let’s use it to our advantage.

Fun Fact

Conventional loans with a loan-to-value (LTV) less than 80% must pay mortgage insurance and will typically have a slightly lower interest rate than a loan with 80% LTV.  As crazy as that sounds, it makes sense.  Here’s why:

Loans that have mortgage insurance go through a second underwriting process through the mortgage insurance company such as MGIC or National MI.  This is a third-party underwrite.  In addition, the loan itself is insured against potential losses to the bank in the event of a foreclosure or short sale on the home.  The bank purchasing the loan will price the interest rate better than 80% LTV because layers of risk were mitigated and insured.  Think about it, the bank lends on risk/reward.

3 ways to pay PMI with Conventional Financing

Mortgage Insurance, for conventional financing, is priced/scored based on the borrower’s FICO score and LTV or down payment.  The better the FICO score, the better the pricing.  Each option comes with a list of considerations before picking which option is the best.  A later blog post will outline these considerations.

  • Monthly PMI – The most common method for paying mortgage insurance because it’s the cheapest in the short term.  Many borrowers pay the monthly factor and refinance once their home appreciates to having 20% equity.  There is no additional fee added to closing costs to have monthly PMI.
  • Single-Premium PMI – Becoming more common when borrowers have high FICO scores and are putting 10% or more down to buy a home.  This option “buys out” the monthly PMI and is tax deductible through 2020, for now.  Visit the IRS site for additional details.  A borrower can also refinance with single-premium PMI and include the cost in their loan amount if it makes sense.
  • Lender-Paid PMI (LPMI) – With LPMI, the lender pays the single-premium mortgage insurance on behalf of the borrower with a higher interest rate.  The result is no upfront expenses and no monthly PMI.  As some point, the borrower will want to refinance to get a lower rate, provided the equity is at 80% LTV to avoid any PMI.  LPMI requires a thorough review of a borrower’s profile to understand how their payment is impacted. 

FHA vs Conventional

Borrowers should note that monthly mortgage insurance is not permanent on conventional loans like it is for FHA loans with less than 10% down or less than 10% equity.  The Homeowner’s Protection Act of 1998 (HPA) mandates that PMI (mortgage insurance) on conventional financing must drop once the loan amortizes to 78% LTV.  On FHA, you must refinance (or payoff your mortgage) to eliminate the mortgage insurance for any new loans originated today with less than 10% down. 

However, it is possible to request the Mortgage Insurance company to drop your PMI before your loan amortizes to 78% LTV if you have a conventional loan.  If the equity in your home has appreciated to 75% and you’ve held the PMI for 2 years, you can request the Mortgage Insurance company to perform an appraisal to show the value is 75% LTV.  Some of my clients have been successful in this approach.  They can keep their first mortgage terms such as the interest rate and remaining loan term.  A good mortgage advisor will be able to help you forecast expectations and plan reasonably for different considerations.

Summary

Mortgage Insurance enables First-time buyers and seasoned homebuyers to access homeownership without breaking the bank.  The overall cost of PMI is minimal compared to the equity gained over a short period of time.  It allows consumers to keep additional cash, otherwise used for the down payment, in their saving accounts and budget responsibly for homeownership. 

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When is a Good Time to Buy a Home?

The first time the idea of purchasing my first home came to light, it was my future father-in-law that made the suggestion.  This was 2 years before I became a loan officer in 2012.  I was working in retail finance, but had so much debt from school, the idea of homeownership never crossed my mind.  The suggestion from my future father-in-law came up because I needed a place to live.  It also may have been a plot to marry his daughter, my now lovely wife.  But we will move on from there.

Necessity vs Timing

Most of the time, people get the idea of purchasing a home because they have a lease coming due to either renew or move on to a new place.  This creates a necessity for maybe buying a home.  It feels convenient to start looking for a home to buy right away when these scenarios come up:

“I am paying $1700 to rent, my lease is coming due, I’d rather pay this money toward a home”. 

Or, it’s: “I am paying $1700 to rent, my landlord is selling the place, they are requiring me to move.” 

Finally, some scenarios playout like this: “I am paying $1700 to rent, my landlord is raising my rent to $2000, I need my own place”.

Everyone’s example of necessity is different.  I find that most prospective borrowers are not prepared for WHEN this time comes.  It’s never a matter of IF this happens but WHEN this happens. 

Take note, you may not be in the position to buy a home now, but it makes good financial CENTS to start preparing and planning for this later.  You then can take necessity and control it with your timing.  Preparation is the key to anything financial and puts YOU in control of your necessity.  Check out steps to pre-qualify for a home loan

Income, Credit, Assets

Perfect credit nor a six-figure income are necessary to purchase a home.  It’s true that your income, credit and assets determine how much you could pre-qualify for or afford for a mortgage payment.  Here are some general tips for when it’s a good time to buy a home:

  • INCOME – You should have a 2-year work history.  This simply means you should be able to show you have consistently earned some sort of income, generally in the same line of work.  There are many types of income considerations, especially for self-employed or variable income borrowers.  Stable and consistent are what the underwriting guidelines measure.
  • CREDIT – A 740 FICO is not required for qualifying for a mortgage loan, nor is perfect credit.  Government loan programs (FHA, VA, & USDA) have exceptions for certain types of credit from how low the scores can be to when a bankruptcy must be seasoned by.  I’ve had Buyers at 580 & 600 FICOs qualify and purchase a home.  Others had bankruptcies seasoned 2 years or less.
  • ASSETS – Down payments are not as scary as some people imagine and are much lower than people realize.  Veteran borrowers need $0 down (in most cases), FHA buyers need at least 3.5% of the purchase price and Conventional buyers can put either 3% or 5% down as the minimum, depending on their income profile.  See more about down payment sources

Market Influences

Have you heard in the last 10 years, “It’s a great time to buy a home!”?  This phrase has been used so much over the last 10 years that it frankly means nothing anymore.  Yes, it is still a good time to buy a home.  But we must ask ourselves WHY in the new decade.  The last 10 years included the recovery of the housing crisis from the recession of 2008.  Analysts are saying we’ve recovered from 2008 and are now where we should have been (hence why it’s called a recession).  So, what does that mean for the future?

The future of homebuying remains strong for most markets largely due to technology and how business is conducted.  Right now, the southwest is a hot market for new emerging and developing businesses and becoming a safe haven for year-round operations for manufacturing and call center business types.  Property taxes, land, and cost of living are much less in most parts of the Southwest and offer a lifestyle for employees that most of the country cannot compete with including year-round sun, Interstate access for distribution, and close proximity to places like California, Las Vegas, and Mexico.  Basically, housing in the Phoenix Metro area is going to continue to thrive, even in a recession because Arizona is what Governor Doug Ducey calls “open for business”. 

What does this mean for buying a home in our market?  Your property value will continue to appreciate even now.  There is a shortage of housing in Phoenix for homebuyers and renters alike.  As our market attracts more businesses, there is a need for housing all over the valley.  It’s basic supply & demand with housing and it’s expected to continue.  Your home will continue building wealth for your future.

Summary

Buying a home is personal and not always for everyone.  See Beyond the Numbers.  It takes some responsibility to understand the opportunity.  Only you can make that decision.  10 years ago, the decision was easy because home prices were extremely low.  Today, it’s a little more complex only in as much the level of preparation of the prospective buyer.  We are here to help in that preparation.

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6 Different Down Payment Sources

I speak with a lot of prospective homebuyers and nearly always get the question “where can my down payment come from”?  It’s a good question because there are specific sourcing requirements regulated by underwriting guidelines with FHA, VA, USDA, and conventional financing.  Down Payments, next to income sourcing, cause the most headaches.  Below is a general idea of where the down payment for your home can come from.

Income Tax Refunds

This time of year is notorious for people thinking of buying a home largely due to anticipated tax refunds.  Tax refunds open the doors for paying down large chucks of debt and/or putting at least the minimum down payment up for buying a home.  This is an acceptable source of funds for down payments.

However, you should have these funds in your possession before you shop for a home.  Unfortunately, you risk deposits and money paid up front for services like a home inspection and appraisal if you start shopping too soon. 

401k Loan & IRA accounts

If your company offers a 401k retirement plan, you should be contributing to it every paycheck.  Over time, your vested balance builds and helps create some sense of retirement savings.  The majority of plans allow you to borrow against your 401k, creating opportunities to consolidate debt at a lower rate or fund the down payment needed for purchasing a home.  Every plan is different, but typically you can borrow up to 50% of your vested balance.  Many homebuyers I speak with do not realize the power of this asset.

Your payments on the loan come directly from your paycheck each pay period and are based on a loan term you set.  In addition, there is no credit check for this loan, and it does not count against you when calculating how much you qualify for because the money borrowed is secured by the balance.  The downside to this is most of the time, the money your loan is backed by may not be invested in the market, causing you to lose earning potential. 

The IRS allows a one-time first-time homebuyer penalty free withdrawal from your traditional IRA account of up to $10,000 for a down payment to purchase a home.  You will likely pay taxes on the money withdrawn, but not the 10% penalty for being less than 59 1/2.   Visit the IRS site for more details.

Gift Funds

Many people are surprised to learn that a family member or spouse can gift you the funds needed for the down payment to purchase a home.  If purchasing a primary residence, that gift can be 100% of the funds needed when it’s a FHA, VA, USDA or conventional loan.  Jumbo financing allows a gift of funds, but usually 5% of the funds needed must come from the borrower. 

If you have a family member willing to gift you the down payment, make sure you speak with your Loan Officer about how they should transfer the funds.  The paperwork gets tedious if you do not follow instructions and can cause anxiety for the donor.  For information concerning taxes & gifts, consult your tax preparer.

Your Money Saved & Small Business Account

Funds that have been seasoned more than 60 days in a bank account can be used for the down payment on a home.  The bank views this as a compensating factor when determining your loan eligibility.  It does not mean you will be denied a loan with the other forms of down payment.  Simply that the bank considers your ability to manage money in your favor for having saved up to buy a home.

If you are self-employed, your business funds can be used as a down payment for a home.  Certain requirements must be met for this to work.  But it is possible.

Cash on Hand

Probably the most common question we get is “can I use my mattress money for the down payment”?  The majority of the time the answer is no.  However, if we can show a pattern of cash withdrawals that add up to the cash you have on hand, then yes, it is possible to use cash on hand.  Certain requirements must be met such as reviewing 12 months of bank statements (or more) to “find” the cash withdrawals.

Trust me, it’s much better to have the other methods serve you with the down payment than this option.  I’ve done it before, and it was extremely time consuming for both the borrower and the underwriter.

1031 Exchanges & Equity on Sale of Home

A 1031 exchange is a tax code that allows the Investor to use the equity of the sale of a home (usually investment property) as the down payment on another home (usually investment property) to avoid paying the capital gains tax on the equity.  In cases where a borrower is selling their primary residence home and the equity is above the maximum allowed where taxes would be due, they can also do a 1031 exchange on the home they are buying.

Most homebuyers won’t need to consider a 1031 exchange.  Yet, there are many circumstances you may decide to sell your current home and use the proceeds of that sale to purchase another home.  You may do this in a simultaneous closing scenario, meaning you do not need to have the cash in your account right away.  Certainly, your Real Estate agent will need to help prepare you accordingly.  But this is an option if you own a home and still need cash for purchasing a home.

 Summary

The list can actually go on with down payment types and sources.  This is a good chunk of the opportunity where a borrower might consider coming up with a down payment.  The amount of down payment needed will be discussed in another post but depends on the loan program, type of loan, investor requirements etc.  In addition, not mentioned are Down Payment Assistant Programs.  For now, use this as a general guide for understanding where you might be able to come up with a down payment.  Reach out if you have a scenario for us to run by!

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Beyond the Numbers

Owning a home can be as abstract as the American Dream.  It is what you make of it.  But I firmly believe there are fundamental values in Homeownership that go beyond the numbers.  I mention on my site, “a place to call home” as a bullet point of owning a home.  This is what I mean.

Homeownership brings families together

This idea is not the end all to solve all the world’s problems.  But it is a good start to promoting family values which in turn help contribute to good virtues in a culture.  These things can lead to economic development and a healthy outlook on life.  It’s that hope we long for in building our families and passing on a legacy to children.  Home is where traditions form or carry on which always help bring families together making our most precious commodity, time, of importance.  When we focus on our families in a comfortable setting, we are at home in some form.  In this case, it’s YOUR home. 

A voice in your community

A lot of attention today is focused on what is happening all around the world.  But what about your community or small neighborhood?  Homeownership has always promoted a vested interest in the community surrounding you; your neighbors, the local coffee shop or restaurant, High School athletics, small businesses, etc.  Who determines how the community is formed?  It’s always been the current Homeowners of today, not the owners of the past.  There is certainly a legacy to be honored with the past.  Continuing to maintain a community is also part of Homeownership. 

My personal experience with this has evolved in the last few years participating with the local Chamber of Commerce, events, and developing great relationships with my surrounding neighbors.  My reasons for being involved in some capacity were about creating a legacy for my kids and setting an example of what civic duty and responsibility looks and feels like.  The rewards have been abundantly great and created a vested interest in what happens with the future of the community we live in.

Homeownership & Stability

Owning your home certainly has its financial benefits.  Ways you can manage your equity can be found here.  Beyond the numbers it also promotes a sense of stability.  In times of a slow down with the economy or your business, your home may get you through the event because you developed good financial literacy in the process of ownership.  Your mortgage payment and overall household expenses are reasonable enough with budgeting and a slow period.  The added advantage is not needing to uproot your family because your lease is coming due or a Landlord wishes to sell the home to someone else.  While it’s not the ideal situation, selling might be what you need to gain new ground in starting over. 

None of us are immune to the risk of a slowdown.  In 2014, when I was beginning a new career, I sold my home to start over financially, using the equity to pay expenses.  While it was a difficult time, I was happy that I owned my home and had that opportunity.  Within 15 months, I bought a new home so that our family could have that sense of security once again.

Conclusion

Talking with people about the value of homeownership often brings about this kind of conversation.  The numbers can make sense to nearly everyone.  But the action of “taking the next step” is almost always because of a hope or dream of some kind.  It usually comes from the heart in the end.  That is truly beyond the numbers.

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3 Steps to get a Loan Pre-Qualification

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 location.

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 discuss:

  • How long have you been renting/leasing?
  • What kind of monthly budget are you planning for?
  • Is this your first home purchase?
  • Are you self-employed or do you work for a company?
  • 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.

Credit Reports

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 score. 

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 forms
  • 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!

Conclusion

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.