So You Think You Might Need a Mortgage? August 1, 2007
The mortgage industry is facing historic times with the tightening of underwriting guidelines, programs disappearing and lenders not able to fund loans and/or closing shop. The subprime meltdown is spilling into the prime mortgage markets. Here is what you need to do if you’re considering buying a house and you’re not paying cash for your new digs.
1. Select a Mortgage Professional as soon as possible. Ideally, this could be six months in advance or sooner. Your Mortgage Professional should:
- Perform a complete credit review to see if there are any improvements that can be made to your current credit score. Sometimes, this could be as simple as readjusting your current credit balances, other times it’s a bit more elbow grease. Whether you are buying a home or not, your credit score is crucial and impacts what you pay for credit, insurance, etc. If your score is below 680, your Mortgage Planner may help with a plan to refer you to a qualified credit repair service (I do not recommend finding one with out a referral).
- Determine how much of a mortgage you qualify for and help develop a strategy to have you in the best possible position when you’re ready to buy a house. Getting prequalifed will show you how much money will be needed for your down payment and closing costs and what your estimated monthly payments will be.
- Review your short and long term financial goals to make sure that you are considering the proper mortgage vehicle for your personal scenario.
2. Work on having your credit score at 680 or above if possible (700 and 720 are also good benchmarks to aim for). You can purchase homes with a lower score, there are still programs available. Unless you’re using FHA or VA financing, you will want to have a better credit score to provide you with the most attractive rates and more options with your mortgage.
3. Once you know what mortgage payment you qualify for, try to have six months of your proposed total mortgage payment (PITI) in savings (also referred to as “reserves”). This savings should be separate from the funds that are needed for your closing costs and down payment. Again, some programs may not call for this much reserves (such as FHA and some alternative products). You really should have some bucks in the bank before you take on the responsibility of a mortgage just in case you employment changes or health issues arise. Life happens when you least expect it.
4. If your new mortgage payment is higher that what you’re currently paying for housing (rent or current mortgage), make the difference of that higher payment to yourself in a savings account. This could go towards adding to your “reserves”.
5. Work on gathering the documentation that will be required from you in order to proceed with getting preapproved. Your Mortgage Professional can provide you with a complete list which will vary depending on if you’re self employed, salaried, etc. Two years employment history is pretty standard (there are exceptions with enough down payment and high enough credit scores). A “full documentation” loan will provide you with a much more attractive rate than “stated income” or “no-income verified”. Your preapproval can be updated once you’re in a position to make an offer on a home.
A mortgage is one of the largest debts you may have in your lifetime. It pays to understand the home buying/financing process and to learn as much as possible. This is not the time to shopping around for your next home without being preapproved by a Mortgage Professional. If you’re considering buying: take your time, do your homework, do it right.
This advice also applies to those of you who currently have adjustable rate mortgages coming due in the next 6-12 months…please don’t wait, take action now and start preparing to refinance by taking the steps mentioned above.
Check out these related posts:
- Underwriting Guidelines are Tightening Up
- There’s No Love for the Subprime Borrower
- RCG Reader Asks: Can You Beat this Rate?
Article Tags>> ARM | credit | full-doc | Mortgage and Lending | purchase | refinance | stated-income | underwriting
- Posted in : Agent Advice, Buyer Information, General Real Estate, Mortgage and Lending
- Author : Rhonda Porter
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Comments»
Great advice, Rhonda.
I have a hypothetical question for you. Say you’re talking with a first-time home-buying couple that is in the market for a $350,000 house. They’re interested in traditional financing, 20% down with a 30-year fixed-rate loan. They qualify for a good rate, and have the necessary income to make the payments (the PI portion of which would be roughly $1,750, if my calculations are correct).
My question is, given the advice you provide in the post above, how much total should our hypothetical couple have saved up? $70,000 for the down payment, plus… what? I’m just looking for ballpark figures here, to satisfy my curiosity.
Tim,
Based on Rhonda’s post wouldn’t that be
$ 70,000 + (6 x $ 1750) = $ 80,500.
thanks.
Hi Rhonda, I second The Tim. Very useful information and advice.
I’m curious if the reserves has a dynamic impact or if it’s just a threshold to get approved.
For example if I buy a $500k home with 20% down ( $100k ) to 7% interrest rate 30y fixed mortgage equalling ~$3000/month payments I will need $18k in reserves to equal your advice. If I have $40k in reserves would it be better to use the $40k - $18k = $22k to add to the downpayment or would the extra reserves buy me a better interrest rate to make it a better use of that cash?
khans,
Your $80,500 figure factors in neither closing costs nor the TI portion of the 6 months of payments. I can do the math you did, but I was hoping to get a mortgage professional’s estimate of the TI and closing costs.
Tim, your example is using 20% down which is an option for your scenario. A FTHB might not have that kind of dough. I’ll entertain your example first.
Based on 20% down:
$70,000 for the down payment plus
$5400 closing costs (assuming they are paying a point, it’s their choice), plus
$2764 for taxes and insurance reserve account =
$78,164. This is your closing costs plus down payment. I recommended 6 months PITI (which would be approx. $2165 factoring in taxes and insurance)…so 78,164 + $12987 = $91,151.
The 6 months reserves can be in the form of IRA, Stocks, etc. If it is a retirement account and the lender is requiring a certain amount of reserves, the lender will only allow the borrower to use 70% of the value of the account.
Like I said, many FTHB may not have that saved up. Just to provide another example (which I mention in my post), assume the FTHB uses FHA to purchase instead (they can also opt for 5 or 10% down, too). This is a rough est…
$350,000 sales price
est. FHA down payment: $10,500 (can be gifted by family member)
FHA closing costs: $4800 plus reserves for taxes and insurance of
$2764 equals closing costs and down payment (roughly) of $18,064.
PI&mi payment for this scenario is approx: $2380.16 plus taxes and insurance $2795.16 total payment. $16,770 (6 months PITI) plus $18064 = $34,834.
FHA does not have a 6 month requirement (odds are neither would a 20% down purchase)…I recommend it.
Sellers can contribute up to a certain percent towards closing costs (depending on what the buyer’s investment–percentage down–into the transaction is) leaving more cash/reserves for the buyer.
tj,
I would really need to know the persons entire financial package to provide advice. Personally, I prefer to see people with reserves or to be more liquid vs. sinking all of their money into their home equity. Again, this depends on how much money one has, what their qualifying ratios are, etc. Your investments can earn interest, your home equity does nothing (as far as earning interest).
My main point in this post was to let people know it’s not the losey goosey lending use to be (thankfully). Plan on having savings and good credit in order to buy a home.
Sorry, Tim…I had a long answer! And I typed so quick, I hope it’s correct math.
So how many of your buyers in the past 2 or 3 years fit this scenario? I would say under 50% easily…..
I like the bit about credit repair service (inflate credit score artifically) to get the best loan rate. There is a reason it was low in the first place imo.
magnolia44,
The example I did was The Tim’s request. The credit repair service that I recommend is a long term program, not a rapid rescore type system. Often credit reports are inaccurate or there are easy changes one can make to help improve their credit score. Everyone should check their credit…do you?
magnolia44, I did a post back in March of this year which summed up my business for the past 2 years (March to March). At that time, I had 39% of my clients with 20% or more down. My business has changed quite a bit this year and I’m assuming I have more 20% down buyers now. I might do a new post on that towards the end of the year.
Thanks Rhonda, if you omit the advice part and I phrase the question like this instead: will a buyer with nearly perfect credit score get a better interrest rate if he has a big reserve or does the reserve only serve as a qualifier and is only applicable if the buyer are deemed a risk due to factors as low credit score, border line income, questionable employment history or other?
Thanks for posting those figures, Rhonda!
Now, let’s double the home price which works well for the ‘average’ home in my neighborhood (not too far off, and certainly more than $350K)–I am now using $700K, so I guestimated some of the figures below based upon doubling of the loan amount, down payment, and taxes).
Using the standard (non-FHA) financing with 20% down, we’re looking at:
$140,000 for the down payment plus
$8200 closing costs (assuming they are paying a point, it’s their choice), plus
$5000 for taxes and insurance reserve account =
$153,200. This is your closing costs plus down payment. I recommended 6 months PITI (which would be approx. $4000/mo factoring in taxes and insurance), so 153,200 + $24,000 = $177,200. WOW! How many of us have that kind of cash in our accounts right now? How many of us wish that we did?
Now for a dual-income couple both having high 5-figure or low 6-figure salaries, theoretically it should be doable to save this kind of bank in a few years, assuming that they are disciplined enough to save and don’t have other significant debts (college loans, huge car payments, etc). I’m sure that quite a number of people in my local area fit this decription, which explains how they can afford to live where they are.
But for the rest of us who are making closer to the median income for our area, it’s going to be really difficult to access this type of dough w/o dipping into 401K funds (bad idea as you have said).
It will be very interesting to see how this all plays out, and only time will tell how many recent homeowners will eventually get into trouble because of interest rate resets and/or other financial troubles (job loss, partner quits work to stay home with children, etc). If one is running cash-poor every month and has no reserve, losing a job can easily force one to sell (or do other crazy things like put house payments on a CC).
“It will be very interesting to see how this all plays out, and only time will tell how many recent homeowners will eventually get into trouble because of interest rate resets and/or other financial troubles (job loss, partner quits work to stay home with children, etc). If one is running cash-poor every month and has no reserve, losing a job can easily force one to sell (or do other crazy things like put house payments on a CC).”
Very true. Many people buy on both incomes. I’m always thrilled when I see someone who can qualify on one. It’s rare. Most people don’t seem willing to buy further out in more affordable areas or to start with a condo/townhome (if we’re talking FTHB) like I did. Everyone wants the 3 bed/2 bath what a garage in Seattle.
But, according to the Seattle Bubble site, I thought all of people who are waiting for the bubble to burst have tremendous assets and incomes?
I’m concerned…very concerned. I’ve dished out a lot of advice to people and clients and I hope they’ve worked on their credit. When I did my stats back in March, I was relieved to see that I do not have as much “subprime” as I thought. Our company is family owned and pretty conservative. As I’ve mentioned in posts before, I have never done an Option ARM.
When I retire from mortgage, one day I’ll be talking to grandkids (hopefully) about when I did mortgages back in 2007.
To make the situation more specific and hopefully easier to answer you can assume a situation with a buyer with nearly perfect credit score a net income of $15k with no other debt. If this buyer want to purchase a $500k home with 20% down will he get an interrest credit with a big reserve?
tj-
“will a buyer with nearly perfect credit score get a better interrest rate if he has a big reserve or does the reserve only serve as a qualifier and is only applicable if the buyer are deemed a risk due to factors as low credit score, border line income, questionable employment history or other”
What will impact your rate is a combo of credit score, down payment and being able to go full doc (2 years stable employment same income). I am just starting to have reserves pop up on approvals where they never did before. Recently the borrower was a 690 score and needed 6 months reserves. It’s all automated (up to that lovely computerized AUS). Reserves helps with underwriting. And if you don’t have an approval and can’t get an approval…it doesn’t matter what rate I’ve locked in at.
This is why if someone is considering buying in the next 6 months or so…meet with a Mortgage Professional.
I need to make dinner. I’ve got a teenage soon who’s saying, “Mom, food or blog? Come on, I’m hungry!”…. I’ll be back later.
tj-do you want to email me some specifics off line? Lenders go by gross income and not net. Depending on what type of income it is (self employed, commisssioned, W2) will also impact how it is figured by the lender. I REALLY need to start on dinner for by “growing boy”.
Rhonda,
I apologize for being somehwhat of a smart a@@ in my last post. I guess you are just trying to inform and educate so my comment was a bit out of bounds. I just think its funny that all of the sudden these rules are coming up, but i see from your later posts it really depends on the combination of things that determine reserves rate & down.
Rhonda I really apreciate you taking the time to answer. I don’t want to abuse it and get free service from you. You already answered what I wanted to know. Thanx!
Thanks, magnolia44 and tj. I am really just trying to get “the word out”. I continue to get calls from people who should be working on their finances instead of writing offers on homes. I don’t want to detour people from contacting Mortgage Professionals. Any true LO worth their mustard will be willing to work with someone (as long as they are committed to the LO) even if it’s 1-2 (however many) years away from when they can/do purchase a home. I think it’s more rewarding when someone I’ve been working years with actually purchases a home!
PS: I’m not trying to stop people from buying home either. Just make sure that you’re qualifed and take the time to do so.
Thanks for the figures Rhonda. That’s exactly the kind of thing I was looking for.
Hey Rhonda,
Great Post!
I just read an email from IndyMac CEO Mike Perry to his employees. Here’s an excerpt (I’d post a link, but I’ve had trouble at RCG with that in the past):
“While we have very strong liquidity, a good amount of excess capital and there are no realistic scenarios that I can foresee that would impair Indymac’s viability (thanks to our Federal Thrift structure), as I said on the earnings conference call yesterday…we cannot continue to fund $80 to $100 billion of loans through a $33 billion balance sheet….unless we know we can sell a significant portion of these loans into the secondary market…and right now, other than the GSEs and Ginnie Mae….the private secondary market is not functioning.
As a result, Indymac like all major lenders, will continue to widen its pricing and tighten product and underwriting guidelines to ensure that a much great percentage of our production qualifies for sale to the GSEs or through a GNMA security (we sold 40% to the GSEs in the 2nd quarter, up from 30% in Q107 and 19% in 2006, and we want to get it up to at least 60% asap). We are hopeful that private AAA MBS bonds begin to trade soon…and have encouraged the GSEs to step in and provide additional liquidity to the secondary markets (their primary role) for both these private securities and other loans.”
That sounds very ominous. My question to you, Rhonda, is are you seeing significant tightening, with numbers of products disappearing, or are there still originators out there playing business as usual?
biliruben, “are you seeing significant tightening, with numbers of products disappearing, or are there still originators out there playing business as usual?”
You have two questions really… yes I am seeing significant tightening and products are either “disappearring” or “on hold” or the pricing for the products, for example “Fannie Mae My Community” is unattractive.
Part two of your question…I guess I can only answer for myself. I’m not sure what “businses as usual” means to you (or to me). Business constantly changes. A few years ago, the only zero down loan I would have done would have been VA. The market constantly reacts and changes as it’s doing now. There’s no “usual”…if I’m understanding your question correctly.
BTW I don’t think the tightening will be forever…I don’t know for how long and “how tight”…eventually Wall Street will get hungry again and the belts will loosen up.
Rhonda,
This is an excellent post. Its pretty intimidating on how much the average FTHB has to save to buy a house in Seattle.
SS, this is my recommendations. If someone is buying FHA (loan limits apply) they can still get in for 3% down and less with a gift from a family member. And, zero down is still out there too…I prefer to see people with some savings left over and that’s really my point about this post.
I would like to see more FTHB buy true “first time homes”. It seems to me that most FTHB’s are buying “move-up homes” for their first homes instead.
Redmondjp, interrestingly enough we are more or less exactly in the situation you describe in your $700k example.
( Potential FTHBs ~$200k liquid (exluding retirement savings), two salaries around the six figures, debtfree etc. )
I wouldn’t think of buying a $700k home though…with maxing out our $401K contributions and keeping a good savings
rate for our kids college found + continous “reserve” savings and consumption of lifestyle items that makes
living good ( vacations, sports etc ) there is no way we would take on a $4000 monthly mortgage payment.
I also wouldn’t think of buying a semi-rotten sub $500k home to get into a “starter” ( we are in our late 30s with kids ) which is what you get in the better eastside communities where we currently live in a very nice rental 4bd 2 1/2 for $1700 a month.
We would be prepared to pay 50% - 75% more a month for owning but not close to 250% more…It would not only
jeopardize our ability to live well and secure our future financial needs but we would also risk to loose our life savings if the market
goes bad. A mortage of that size has a lot of destructive leverage should things sour.
So, now when easy credit is being limited it will be interresting so see if the full Eastide SFH market can be sustained by “moving-up” buyers and FTHBs with quarter of a million + incomes alone or if there will be somekind of a correction.
There still is a smashing alternative to the FNMA My Community mortgage. It’s 100% financing, 620+ credit score, DTI ratios to 50% typically, and the interest rate’s somewhere around 6.625% with the APR about 7.235% (b/c of the mortgage insurance of course). The mortgage insurance, like the My Community, is also reduced (0.59% of the loan amount per annum).
This is, of course, a principal and interest loan.
David, what smashing program are you referencing? Are reserves required?
With this post, I’m not saying that zero down isn’t available (see comment 26) I’m saying that it’s in the consumers best interest to be well qualified–beyond what the LO tells them. Keep some savings in the bank…don’t put it all into the house (home equity). Save more than what is required.
No reserves are required, but you do make a good point, advising people to have some savings in the bank. Our culture needs to start saving more definitely. No need to clarify yourself, you have good advice there.
It’s just that with the evident changes to the FNMA My Community mortgages on 5/22 and 7/22, a good LO simply has to keep way ahead of the secondary market changes, in order to keep their pricing effective.
Email me, and I’ll let you know the program name…it’s right under all our noses…we LO’s have simply just gotten too complacent and have stopped ’shopping around’ ourselves.
I am a little confused by the premise of this entire thread. Is there any evidence that the turmoil in the credit markets is having any kind of impact on East Side home-buyers? From what I gather in previous posts from Rhonda, she rarely ever sees people going for subprime, no-doc, interest only, or option-ARM loans.
If 95% of Belleuve, Redmond, and Kirkland home buyers are prime, then wouldn’t the tightenting credit standards have a negligable impact on them?
Or maybe there really is a growing number of East Side purchasers who have recently started running into financing difficulties. But I haven’t heard Rhonda mention anything about that.
Sniglet, where I have said “rarely ever sees people going for subprime, no-doc, interest only, or option-ARM loans”?
I have done subprime, no-doc and interest only programs. I have NOT done option-ARM loans.
This post does not address specifically the East side or Seattle. The credit tightening impacts all buyers and the subprime market is impacting prime. See my previous post on Fannie Mae.
I don’t specifically work with East-side buyers (al though I’m happy to). I work with buyers all over the state of Washington.
Rhonda,
I am curious, have you been seeing increasing problems with prospective purchasers getting financing in your own business? If so, aren’t people still generally able to get the financing they need by just jumping through a few extra hoops?
Looking at it from another angle: is credit today any tighter than it was in 2001 or 2002? I know things might be tighter than in 2005, but maybe we are just going back to what was common a few years ago.
I suppose I may have been reading too much into some threads where I asked if there were any interest-only or option ARM loans being done in this area, and you had mentioned that you don’t see too many of them.
Rhonda,
Another question: have you ever done 2/28 loans?
Sniglet, I’m running out the door and will respond to 33 later. Quick answer on 34 is yes.
Rhonda,
Aren’t “2/28″s a form of option-ARM, where you are allowed to make artificially low payments for a period of time?
Sniglet - you could make a case that with any non-fixed loan “you are allowed to make artificially low payments for a period of time”.
That doesn’t mean they are all option ARMS. 2/28 simply means a fixed interest rate for 2 years, followed by an adjustable rate thereafter. I assume that there are many varieties of these, including, perhaps, options to pay less than the interest accrued (what an option-ARM is), whereby you are tacking on dollars to the principle. Rhonda doesn’t write that variety, if it exists.
For instance I took out a vanilla 7/1 ARM, where I have a fixed rate at 5% for 7 years, then the interest rate is allowed to adjust (both up and down, theoretically, though almost certainly up, in practice), based on the rate of one of a variety of indeces.
You could say that since I’m paying 5% on my money, it is in a sense an artificially low payment for a period of time, I suppose.
As far as I know, all these products are artificial, however. Though I’ve searched and searched, I’ve never been able to catch a glimpse of the elusive zero-down NINA IO FICA lt580 in the wild.
2/28’s are actually a “balloon” and not an ARM. You need to refi (or sale) in 2 years. 3/27’s also came out after the 2/28’s…same animal just one more year of the fixed rate. Typically, when I did these programs, the 2/28 or 3/27’s were used as the first mortgage in an 80/20 scenario. I referenced this post earlier on my past business. It doesn’t break it out to 2/28s; I did do my share of 100% ltv and if you read the post, many of the clients were prime and opted to use their funds elsewhere.
If I understand you correctly IOs/ARMs or almost any mortgage type are counted as prime if the borrower is validated as prime for the mortage amount and type. I.e a low credit risk for the specific mortgage.
sniglet would be correct that the new standards shouldn’t impact high cost areas as the East side much if the following are true:
- The vast majority of mortgages issued for East side purchases are prime. As sniglet, I think I’ve seen this stated already by someone in another post. If it’s true or not I have no idea.
- To be considered prime it was required to qualify for the highest PITI prior to the new standards. This is where I’m not sure.
Rhonda, could you be labeled prime by having prime status according to the artificially low payment period of an IO/ARM prior to the new standards?
- Or if there was in fact more or less only traditional 20% down 30y fixed loans used on the East side.
Re: #13
Grandma, what is a “mortgage?”
tj
A “prime” mortgage is “a paper”. It can be an interest only fixed period ARM and qualifying WAS done at the interest only payment. To answer your question, yes could be “prime” and have an I/O mortgage.
I would assume that in higher priced areas, you would see 20% down (or more) more often than lower priced. I don’t have stats by region with mortgages.
You will still have people using subprime or alt-a products to buy in higher priced areas. You’ll have less of products where there are income limits or loan limits.
I’m going to be in a seminar for the first part of today…so I won’t be able to respond to comments. Just want you to know I’m not ignoring anyone.
E-You’re funny!
Thanks Rhonda,, so there you go sniglet even if the East side homes are and were purchased with only prime mortgages it could still be impacted by the changes if parts of them were IO/ARMs that were qualified on the IO payments since that is now being much more restricted. But as Rhonda said, only time will tell.
Hi Rhonda, Are you seeing a trend where properties are not appraising at the sale price? What advise do you have for first time home buyers regarding property appraisals? What should they look out for before placing the offer?
Rhonda,
With all the turmoil in the mortgage industry this week I am curious if you have noticed any direct impact in your work? Have any of this week’s changes in the mortgage industry caused any of your clients to have trouble with their financing? Or can people still get financing, just with different terms, and with different lenders?
Sandy, only the bid up sale that I mentioned earlier…and it was crazy. That had no reflection of the market changing and has only happened once.
I have not had a full price offer not appraise at value yet.
Looking at these numbers makes me very grateful I’m in the midwest. Is that really a 2,000 sf house with a 5 car detached garage I bought and fixed up for under $125k? Yup. I don’t think I’d be in the buying market in Seattle, just from the looks of things.
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