First time home buyer, started mortgage process

[Anonymous]

I zeroed in on a townhouse in Raleigh, NC that I plan to live in for just a couple of years & then move on to a single family house afterwards. I am about to start the mortgage process when my Amex's EX fico score drops 30 points from 671 to 640. I combined 2 capital one accounts last month and suspect the account closure must have caused this, though I think 30 points is a bit too much.

So, I just bought the 3 bureau report from myFICO and thankfully, the mortgage scores are higher than their fico 08 counterparts(see signature below).

The townhouse is a new construction and priced at 152k. I make 85k (last 2 years avg). Middle mortgage fico score is 689. Credit Util is around 3%, AAoA is ~30 months. Have a paid off auto loan and 4 open credit cards on file. 2 settled charge off credit card accounts and a related paid collection from 6.5 years ago. Newest account is 7 months old. Oldest is around 8 years old. DTI will be around 20%, so no worries there.

Bankrate.com shows up a 3.385% APR when I tried a generic search for a 15 year fixed mortgage with 20% down. Don't qualify for anything other than conventional. You think this is the best I can do given my current profile?

Also, I plan on converting this townhouse to an investment property in 2 years when I get a single family house. Should I be thinking about that while figuring out the mortgage terms for this townhouse?

[Revelate]

If the plan is to be out in a couple of years, why not go with a 5/1 ARM or similar?

I'm actually halfway debating refinancing off my 15 year fixed as I realized today within 5 years I know I'm going to be out of this place or staying in it forever and I could drop my monthly payment by around 800/month with an ARM and even if the rates got jacked up to the max it'd still be around the average historical 30 year fixed rate which isn't the end of the world.

[Anonymous]

I don't want to consider an ARM because, I don't want to get rid of the house in 2 years, will simply declare that an investment property and rent it out.

[StartingOver10]

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@Anonymous wrote:
I don't want to consider an ARM because, I don't want to get rid of the house in 2 years, will simply declare that an investment property and rent it out.

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Good idea. Make sure that the loan you are getting now will be supported by the rental market today. The presumption being that future rents will be higher than current rents. You don't want to have a property where the cash flow is negative.

You have a couple of options because this townhouse will be your primary residence first for ~5 yrs:

• Go FHA with a minimal downpayment (3.5% is typical but you might consider putting down 10% to drop the MIP after 11 years)
• Go conventional 5% - you will have PMI and it will be at a higher rate with the LTV so high and your current scores. Google the PMI rate cards so you know.
• Go conventional with a larger down payment

Have a LO give you the costs for each of the loans so you can compare not only your acquistion and carrying costs now, but what your return would be if in fact you did keep it as a rental property sometime in the future. Make sure to have a conversation with your CPA too. 

PS There are tax consequences when you sell off your investment property, make sure to get a complete understanding of your undertaking so you can plan appropriately.

[Anonymous]

I will have enough to put 20% down by the time I close. Also I can only go conventional coz I am not an American citizen. My realtor sent me a nice spreadsheet with the calculations for different rental scenarios. The area I am looking at supports a positive cash flow with 30 year conventional and a negative cash flow of around $200/mo that improves progressively with a 15 year conventional.

I was thinking of going with a 15 year loan coz I can afford it and hate the extra interest with the 30 year. But I will talk to a CPA so I don't make any mistakes now that might jeopardize the next home buy that I expect to be around 500k. Thanks for your advice StartingOver10 and Revelate.

[VALoanMaster]

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@Anonymous wrote:
I zeroed in on a townhouse in Raleigh, NC that I plan to live in for just a couple of years & then move on to a single family house afterwards. I am about to start the mortgage process when my Amex's EX fico score drops 30 points from 671 to 640. I combined 2 capital one accounts last month and suspect the account closure must have caused this, though I think 30 points is a bit too much.

So, I just bought the 3 bureau report from myFICO and thankfully, the mortgage scores are higher than their fico 08 counterparts(see signature below).

The townhouse is a new construction and priced at 152k. I make 85k (last 2 years avg). Middle mortgage fico score is 689. Credit Util is around 3%, AAoA is ~30 months. Have a paid off auto loan and 4 open credit cards on file. 2 settled charge off credit card accounts and a related paid collection from 6.5 years ago. Newest account is 7 months old. Oldest is around 8 years old. DTI will be around 20%, so no worries there.

Bankrate.com shows up a 3.385% APR when I tried a generic search for a 15 year fixed mortgage with 20% down. Don't qualify for anything other than conventional. You think this is the best I can do given my current profile?

Also, I plan on converting this townhouse to an investment property in 2 years when I get a single family house. Should I be thinking about that while figuring out the mortgage terms for this townhouse?

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Hi Opinionated,

Couple of questions.

1) It looks like can qualify for a SFR right now so why wait? The future cost is an unknown but all indications are rates & prices are going up.

2) Why is conventional your only option?

3) If you're going to convert this to a rental you should really reconsider staring out with a 15 year note for a couple of reasons.

     A). You want the rent to be affordable for the purpose of competing with the other rentals in your market &

     B). If you have to cover that payment because you have some vacancy issues or your tenant doesn't pay then you want the payment to be affordable.

I would take out a 30 year fixed and pay extra towards the principle instead of doing a 15 year because it doesn't offer the same flexability.

4) I would also really look at your breakeven point when deciding on how much money you put down because once you tie that money up in a house it's difficut to get it out.

[Anonymous]

1) It looks like can qualify for a SFR right now so why wait? The future cost is an unknown but all indications are rates & prices are going up.

How is an SFR different from a conventional? I have never heard of such a product. Can you please explain.

2) Why is conventional your only option?

I am not an American citizen, so I don't think I will qualify for anything else other than an ARM which I want to avoid knowing that interest rates are going to rise.

3) If you're going to convert this to a rental you should really reconsider staring out with a 15 year note for a couple of reasons.

     A). You want the rent to be affordable for the purpose of competing with the other rentals in your market &

     B). If you have to cover that payment because you have some vacancy issues or your tenant doesn't pay then you want the payment to be affordable.

I would take out a 30 year fixed and pay extra towards the principle instead of doing a 15 year because it doesn't offer the same flexability.

I think I should run the numbers with this scenario. Thanks for the idea.

4) I would also really look at your breakeven point when deciding on how much money you put down because once you tie that money up in a house it's difficut to get it out.

How do I determine this break even point?

[StartingOver10]

SFR=single family residence. It isn't a loan program but a property type.

There are different loan programs for foreign nationals. You will need to work with a lender that has programs devoted to funding foreign nationals. There are few lenders that handle this niche and the programs vary widely from lender to lender.  Check into the reserve requirement for foreign nationals - it is generally much higher than for US Citizens.

Also, please note that different types of properties have different loan requirements - condos are the least flexible. You have to review the legal description to see if the property you are interested in purchasing is a condo or a townhome. You can't tell by looking at the property itself.  If it is a condo, it will say so in the legal description.

[VALoanMaster]

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@Anonymous wrote:

1) It looks like can qualify for a SFR right now so why wait? The future cost is an unknown but all indications are rates & prices are going up.

How is an SFR different from a conventional? I have never heard of such a product. Can you please explain.

2) Why is conventional your only option?

I am not an American citizen, so I don't think I will qualify for anything else other than an ARM which I want to avoid knowing that interest rates are going to rise.

3) If you're going to convert this to a rental you should really reconsider staring out with a 15 year note for a couple of reasons.

     A). You want the rent to be affordable for the purpose of competing with the other rentals in your market &

     B). If you have to cover that payment because you have some vacancy issues or your tenant doesn't pay then you want the payment to be affordable.

I would take out a 30 year fixed and pay extra towards the principle instead of doing a 15 year because it doesn't offer the same flexability.

I think I should run the numbers with this scenario. Thanks for the idea.

4) I would also really look at your breakeven point when deciding on how much money you put down because once you tie that money up in a house it's difficut to get it out.

How do I determine this break even point?

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1) SFR is single family residence, sorry for the confusion.

2) I'm pretty sure you can go FHA or conventional.

3) You're welcome.

4) You take the difference in the down payment amount & you divide that by the difference in the monthly payment.

I ran some numbers & it would take roughly 8+ years to recoup your down payment.