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Want to buy a home by the end of the year - do I have a chance?

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Anonymous
Not applicable

Re: Want to buy a home by the end of the year - do I have a chance?

Sorry for the multiple post, I had a trouble pasting that block properly. The repayment plan I'm considering is the extended fixed (30-year) plan. It fully amortizes the loan at about 230/month (except for a slightly reduced final payment, of course), but I have to start repayment in order to be able to choose that plan. Are you absolutely sure about the 1% rule? Because I can't see someone with $200k in loans being able to afford a house...
Message 21 of 30
Lemmus
Established Contributor

Re: Want to buy a home by the end of the year - do I have a chance?

...you've cited the relevant section ...that's what the rules are ...if your lender uw sees your payment as "fully amortized", they can use the payment ...else the 1% applies

...not going to try and define what they will interpret as "fully amortized" ...its a rather new rule and it always takes time for things to shake out after new rules are promulgated

 

...unfortunately, a LOT of people are being caught by the 1% rule ...and if you think there might be relief coming, consider that the rule was first promulgated at 2% and the mortgage world went bananas over it ...the 1% is the relief ...at least until congress does something, the loan guarantee agencies can't ignore those huge student loan debts just setting there like bombs waiting to blow up into another housing bubble ...so they acted and this is what the results are ...hth 


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Message 22 of 30
Anonymous
Not applicable

Re: Want to buy a home by the end of the year - do I have a chance?

Lemmus,

It sounds to me like practically, the rule applies when:
(1) the loan is in deferment so the monthly payment can't be 100% verified (though it could be verified using the "mortgage letter" from the loan servicer, which assumes a standard 10-year term, I guess that's sometimes not enough);
(2) the loan is in repayment on a plan that varies with income (income-based or income-contingent repayment);
(3) repayment is at a lower payment than would fully amortize the loan because you've declared a financial hardship and have a temporarily reduced payment; or
(4) the payment amount is below that which would reflect a fully amortized loan for some other reason - e.g. on a graduated plan, it rises every N years, so today's payment amount is very low. They could (if they were willing to put in the effort) hypothetically use the largest planned payment to get the highest potential hit to the DTIR... though that's also disingenuous, as the payment is guaranteed to be that, while the income can be expected to rise in time. The sum of the graduated payments DOES fully amortize the loan, it's just a matter of "Which payment - the low current one or the high future one?"

Because of the complications in (4), I'll be going with extended fixed repayment in the hopes that it will count at the actual payment amount. I think that even if automated underwriting doesn't like it, the LO would be able to make an exception and allow the higher computed DTI, since the actual payment is about 0.4% of the loan amount (talking federal loan only here).

From what I've read on other forum posts by unhappy graduates unable to get approved, the loan being in deferment without a means of verifying the payment amount is what generally forces the 1% rule. Even on financial-advice sites, they talk about the strategy of decreasing DTI by choosing the 30-year fixed repayment plan a few months before applying, so that it shows a couple payments at the reported payment amount prior to the loan app.
Message 23 of 30
Anonymous
Not applicable

Re: Want to buy a home by the end of the year - do I have a chance?

this is one of those things where actually talking to some Loan officers may go a long way. Some lenders might be far tougher on the 1% rule to protect themselves down the road from being forced to buy back loans, while others may be more confident in the "in full repayment" and not overlay 1%. That seems to written intentionally vague, and subject to interpretation. Sitting down and talking with a couple of lenders to get a feel of where they stand on it is probably a worthwhile use of a few hours.

Message 24 of 30
Anonymous
Not applicable

Re: Want to buy a home by the end of the year - do I have a chance?

I would say to keep that $3K in the bank. You don't have tons of cash reserves, which banks love to see (and closing costs can surprise you)

Message 25 of 30
Anonymous
Not applicable

Re: Want to buy a home by the end of the year - do I have a chance?

Well, I just increased the limit on that card from 5000 to 9500, so the 2900 on it now represents less than 30% (rather than over 60%) of the CL. If I do pay any of it off, it'll be after I've put aside enough for the downpayment and closing. How much that is, I'll have to figure out once I get a good look at loan options. USDA loan is looking pretty good, assuming the interest rate is decent. Looking like with a 0% downpayment and 2% added to the loan, the 0.5% mortgage insurance (of the balance remaining at the beginning of the year) makes it a better option than FHA.
Message 26 of 30
Anonymous
Not applicable

Re: Want to buy a home by the end of the year - do I have a chance?

Just a quick update on steps taken to improve my overall situation:

 

  1. Requested consolidation of Federal loans. I know this is not generally a good idea, because it all goes to a single loan at the (weighted) average interest rate, meaning there is no way of paying down the highest-interest ones early (there are ~12 loans with a total value of ~57000). However, when I called to ask for the grace period to be waived*, I was told they legally can't do that. Weird... Anyway, consolidation application is being processed and consolidation should be complete by (I'm estimating) the end of August. Not sure when that will show up on the credit report - and if I should make a payment on it before seeking a preapproval - but it will definitely allow me to get a preapproval earlier than if I hadn't gone this route.
  2. As mentioned before, increased credit limit on Discover to $9500.
  3. Started paying down credit cards. Bank of America and Citi should be paid by the 20th (statement date for BofA), after which I will switch to using Elan for a week (the only one with a statement date not between the 20th and 30th). Discover statement (26th) should update me on what that means as far as the FICO CC score is concerned.
  4. Removed myself from my wife's (Discover) card, and removed her from my Discover card.
  5. Scheduled an interview for tomorrow, hope to get this part-time that should earn me $100-$150 (net) extra per week.

 

*I want my credit report to show a low payment on the loan - not the $570 (1%) per month that's assumed when the payment amount can't be verified, or the $430 per month that the loan servicer claims in the mortgage letter. So I have to switch to the "extended" repayment plan with a term of 30 years ($300-310/mo at 5%?). Since you can't choose until repayment, I wanted to waive the 4 months of the grace period left.

 


 

 

So, as others have said, my biggest issue is the debt-to-income ratio. Below is a list of what my household income should be for each ratio. Assumptions are $240,000 sale price, 5% ($12,000) down, 4.25% interest, 0.8% PMI, no CC bills other than Discover (2% minimum payment, $2900 balance). Conforming loan types are in parentheses.

 

Housing payment: $1122 P&I + $152 PMI + $500 tax + $50 insurance = $1824

Housing payment (FHA): $1141 P&I (incl. UFMI) + $152 MI + $500 tax + $50 insurance = $1843

Other debt payments: $58 Discover + $131 NJ loans + $310 Federal loan + $231 auto loan = $730

 

Front-End

28% => $78,200 (Conventional)

31% => $71,400 (FHA)
29% => $75,500 (USDA)

 

Back-End

43% => $71,300 (Conventional)

43% => $71,800 (FHA)

41% => $74,800 (USDA)

 

I imagine the FHA interest rate would probably be lower, as would the MI rates for conventional and USDA (USDA is 5%-of-principal-remaining). But I don't think any such discrepancies would be large enough for me to qualify with just my income (the only stable job being mine, it might be the only one that they count).

 

I know that with a high-enough credit score, USDA loan servicers can help you reach the required income for the DTI by including part-time income or income derived from a recently acquired position. Has anyone had this adjustment made on any type of loan? I think I would prefer that over having the "non-conforming" label (being accepted with a higher DTI), as I imagine there'd be some sort of rate adjustment for the latter. I also think many lenders would refuse to even start the process if I tell them that my DTIs might be 34/48 (or whatever).

Message 27 of 30
Anonymous
Not applicable

Re: Want to buy a home by the end of the year - do I have a chance?

Hey Everyone,

 

Sorry to revive what seems to be a dead thread, but I got my first pre-qualification yesterday! I'm pre-qualified for $220k at 4.000% with 3% down using a local bank. Mortgage insurance is estimated at 1.1%, with taxes and insurance estimated at $6000 and $1000, respectively. Cash to close is estimated at $14,200, which is exactly what I have. So that's my limiting factor right now, though the DTI is close, at about 44.5%. The bank will allow 45%.

 

DTI calculation:

Payment: $1797.75 = $1018.80 P&I + $500.00 tax + $83.33 insurance + $195.62 MI

Debts: $613 = $46 Discover ($2.3k balance) + $78 refinanced NJ loan + $330 consolidated fed loans + $159 refinanced auto loan. Note all other CC balances are at $0.

Income: $5416.66 ($65k/12)

DTI: 44.5%

 

Having spoken to this lender and a national one (TD Bank), I CANNOT get a pre-approval (and rate lock) from either until I have chosen a property, because they have to count the actual property tax and insurance values and potential flood insurance, and without having a specific home chosen, they can't be sure of any of them. They also have to shop the MI around to nail that number down, and it seems they're not too willing to do that at this stage. So their preferred process is: get pre-qualified -> see homes you think you can buy -> get a pre-approval for exactly the amount of the first offer and make the offer with the pre-approval letter attached -> get another pre-approval for each subsequent offer during negotiations so each has a pre-approval letter attached. I was told that if you give a pre-approval with a higher price than your offer, the seller might say "well, you're pre-approved for more, so why not?" so this lender specifically was recommending getting a pre-approval for each offer I make, even one a day if need be.

 

The issue with this (i.e. not being able to get a pre-approval) is that I can't get a rate lock. If the interest rate goes up to 4.25%, I'm just over 45% DTI with not enough cash to buy it down; if closing costs go up for any reason, I don't have enough cash on hand unless the interest rate goes down enough that I can get reverse points. So this first lender recommended a margin of 0.25% on the interest rate (meaning I should limit the DTI to maybe 44% "to be safe") and $1.5k-$2k on the closing costs. This goes against my original strategy, to try to optimize my credit situation so the DTI is right at 45% and the cash on hand is just enough to cover the closing costs (I put together a very complicated Excel spreadsheet to figure this out, which is why the above numbers "work so well"). It turns out that everyone wants a margin, especially for cash available, which I didn't take into account. I should have a margin of $1,500 by the end of the month, though.

 

FICO Mortgage scores: 779/749/746 as of 9/18 when my situation was identical,except:

(1) I had not made a payment on the refinanced NJ loan (so my "current balance" was higher than my "initial balance"), and

(2) my Discover balance was at $3000 ($60/month payment).

 

The loan officer whispered to herself a FICO score of 771, not sure if that was a mid-score or not (she didn't provide the standard "credit score" sheet, which I found strange).

 

I should mention that although $220k seems to be my limit, with $6k in seller-paid closing costs, the price could be $235k (an effective sale price of $229k). This is because I'd be covering a 5% downpayment, meaning the MI would drop to about 0.6%. For some reason, the LO didn't get too excited about this option, which is weird... I'd be paying the same amount over the life of the loan, I'd be getting rid of the MI sooner, the seller would get more money, and the bank would lose nothing.

 

Next up: talking to a local loan officer from a national bank, and another from a local mortgage company.

Message 28 of 30
StartingOver10
Moderator Emerita

Re: Want to buy a home by the end of the year - do I have a chance?


@Anonymous wrote:

Hey Everyone,

 

Sorry to revive what seems to be a dead thread, but I got my first pre-qualification yesterday! I'm pre-qualified for $220k at 4.000% with 3% down using a local bank. Mortgage insurance is estimated at 1.1%, with taxes and insurance estimated at $6000 and $1000, respectively. Cash to close is estimated at $14,200, which is exactly what I have. So that's my limiting factor right now, though the DTI is close, at about 44.5%. The bank will allow 45%. The 1.1% mortgage insurance sounds very high to me given your scores.  I would shop lenders. To give you an idea, the FHA rate is .85 to compare with the 1.1% you were offered. JMO. Your DTI is not high.

 

DTI calculation:

Payment: $1797.75 = $1018.80 P&I + $500.00 tax + $83.33 insurance + $195.62 MI

Debts: $613 = $46 Discover ($2.3k balance) + $78 refinanced NJ loan + $330 consolidated fed loans + $159 refinanced auto loan. Note all other CC balances are at $0.

Income: $5416.66 ($65k/12)

DTI: 44.5%

 

Having spoken to this lender and a national one (TD Bank), I CANNOT get a pre-approval (and rate lock) from either until I have chosen a property, because they have to count the actual property tax and insurance values and potential flood insurance, and without having a specific home chosen, they can't be sure of any of them. They also have to shop the MI around to nail that number down, and it seems they're not too willing to do that at this stage. So their preferred process is: get pre-qualified -> see homes you think you can buy -> get a pre-approval for exactly the amount of the first offer and make the offer with the pre-approval letter attached -> get another pre-approval for each subsequent offer during negotiations so each has a pre-approval letter attached. I was told that if you give a pre-approval with a higher price than your offer, the seller might say "well, you're pre-approved for more, so why not?" so this lender specifically was recommending getting a pre-approval for each offer I make, even one a day if need be. IMO this is a typical inexperienced type LO response. It is a crummy way to present yourself to a seller. Better to present yourself as a strong buyer than to look like you are constantly maxing out your PQ.  It is true that no bank/lender can lock you in without a contract on a specific property.  In 35+ years of real estate buying and selling both for my own account and for others (I'm a Realtor) I have never heard a seller respond with "well, you're pre-approved for more, so why not?".  It doesn't even apply to negotiations. I have seen sellers throw out offers where the buyer offers less than list and shows they only qualify for what they offered - the point being why even start negotiations with the buyer that is maxed out on his offer? Go with offers where the buyer is strong enough to withstand any bump in the road that may come up in underwriting (higher taxes or higher insurance or something else).  If it were me, I would drop that LO like a hot potatoe.

 

The issue with this (i.e. not being able to get a pre-approval) is that I can't get a rate lock. If the interest rate goes up to 4.25%, I'm just over 45% DTI with not enough cash to buy it down; if closing costs go up for any reason, I don't have enough cash on hand unless the interest rate goes down enough that I can get reverse points. So this first lender recommended a margin of 0.25% on the interest rate (meaning I should limit the DTI to maybe 44% "to be safe") and $1.5k-$2k on the closing costs. This goes against my original strategy, to try to optimize my credit situation so the DTI is right at 45% and the cash on hand is just enough to cover the closing costs (I put together a very complicated Excel spreadsheet to figure this out, which is why the above numbers "work so well"). It turns out that everyone wants a margin, especially for cash available, which I didn't take into account. I should have a margin of $1,500 by the end of the month, though. If you get a better PMI rate you will end up with a lower DTI.....find a better lender. NOT a big box bank. Go to a mortgage banker/correspondent lender.

 

FICO Mortgage scores: 779/749/746 as of 9/18 when my situation was identical,except:

(1) I had not made a payment on the refinanced NJ loan (so my "current balance" was higher than my "initial balance"), and

(2) my Discover balance was at $3000 ($60/month payment).

 

The loan officer whispered to herself a FICO score of 771, not sure if that was a mid-score or not (she didn't provide the standard "credit score" sheet, which I found strange). Your score should get you the very best rates: check this matrix to see how PMI is calcuated based on LTV and score for example:

https://mortgageinsurance.genworth.com/RatesAndGuidelines/RateCards.aspx

 

I should mention that although $220k seems to be my limit, with $6k in seller-paid closing costs, the price could be $235k (an effective sale price of $229k). This is because I'd be covering a 5% downpayment, meaning the MI would drop to about 0.6%. For some reason, the LO didn't get too excited about this option, which is weird... I'd be paying the same amount over the life of the loan, I'd be getting rid of the MI sooner, the seller would get more money, and the bank would lose nothing.

 

Next up: talking to a local loan officer from a national bank, and another from a local mortgage company.


You forget that the lender makes a profit on the MI. I really believe that this lender is giving you a high MI rate to enhance their return, or maybe it is something in your file, but if your score is 771, there is no reason in the world you couldn't get a better MI rate than 1.01%

 

Really, shop your loan. I think you can do better. For sure you can do better if you get a LO that understands you need to present yourself as a strong buyer and not a maxed out buyer that would have trouble closing!!!

Message 29 of 30
Anonymous
Not applicable

Re: Want to buy a home by the end of the year - do I have a chance?

Well, I ended up going with my realtor's recommendation and spoke to a Loan Officer at an actual mortage company*. She managed to use our combined income (my wife's was calculated at $610/month=$7320/year), and pre-qualified us for a $250,000 loan with 5% down and $7,000 seller concessions. The middle credit score for the "worse borrower" (my wife) is over 740, so we're getting the best rates available (0.62% MI, currently 3.875% interest). For anyone doing DTI calculations, her debts amount to $38/month (so now the limiting factor is not our DTI, but rather our assets. Thanks, bank LO, for directing me to do the exact opposite of what I should've done!).

 

*I think they're technically a broker, since the disclosure said they intend to sell it. Lower rate and origination fee than the bank, though...

 

She actually wasn't even done pre-qualifying us when we made our offer - lower than our limit, but lower seller concessions as well - but she got us the pre-qualification letter for that within half an hour (on a Monday evening). Unfortunately, the deal fell through because we and the seller couldn't arrive at satisfactory contract terms, but within the 3 weeks of Attorney Review (unprepared seller with an inexperienced agent), we'd gotten the pre-approval and gotten through most of underwriting. It's only been a couple days since we terminated that transaction, but we're already preparing to make an offer on a higher-priced home. I requested a re-qualification Thursday night (at midnight) for $260,000 with $8,000 in seller concessions, and got confirmation that "it scores" Friday morning at 9 AM. Now it's just a matter of getting a pre-qualification letter for whatever we decide to offer* on this property, which I'm sure will come very quickly after we request it. It's the middle of November now, but (assuming this seller is communicative and has his/her "ish" together) we should still be able to close by the end of the year Smiley Happy.

 

*It seems that's the way my realtor has always done it as well, a pre-qualification letter for the offered amount, not for the maximum we qualify for - just no subsequent letter for a renegotiated price, unless specifically requested by the seller.

Message 30 of 30
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