topic Re: loan approval and equity in Mortgage Loans

loan approval and equity

natasjlp — Mon, 29 Jun 2009 18:01:32 GMT

Hello, I am new to the mortgage world and have been working on my credit so I can buy a house.

I know approval is based on multiple things including income/credit/debt ratio and things like that. My FICO is 700 now and should be moving up in the next few months.

My question is this, my mother would like to sell me her house for say around $400k and it is valued somewhere around $750K - $800K. How or does this affect the amount of the loan? I am thinking (although not done this yet) I could probably be approved for around $250k - $300k based on a standard income/debt etc... preapproval.

How or does the equity ratio of the house I purchase calculate into the loan approval process?

Re: loan approval and equity

Anonymous — Mon, 29 Jun 2009 18:20:03 GMT

couple things:

You will still need down payment funds I believe

Although a high FICO and some reserves will allow a higher DTI, if the online calculators are saying 250-300 max it will be hard to get approved for a 400K loan.

Can you actually afford the 400K loan? The fact of whether the house is worth alot more is great but does not change the fact that it is still a 3-3500 monthly mortgage you will owe plus what Im guessing are some decent utility expenses and upkeep. I would expect 3-400 per month in upkeep easily on a house of the value (and possible more)

To answer the question directly, the equity does help as the lender knows they are not at alot of risk. That said, there are still some minimum guidelines as far as DTI, job history, and your financial situation that will have to be met. That said, there is a good chance you could pull this off, just make sure that it is something that you can realisticly do on your own. Never count on something else to help or take care of stuff.

Re: loan approval and equity

natasjlp — Mon, 29 Jun 2009 18:36:30 GMT

well, the idea is I can rent it out. There are several units that rented out would certainly cover the mortgage plus utilities. I might have to additionaly cover things like taxes and upkeep which I can do mostly myself. i would also be living there and my mother would be be staying rent free in exchange for the price drop. It is a fairly large house. I would say easy 5 units.

My mother doesn't want the work to upkeep it any longer and would like to keep it in the family. I would also like the same thing.

As far as a down payment is concerned. I could always borrow that from my mother in exchange for a slightly higher price equal in value to the loan. so I could borrow 10K for down payment then pay 410k for the house.

If anyone has a suggestion about a better way to go about this I am all ears. Maybe have her 'give' me the house/take over the existing loan, then take out a refi based on equity and give her the ramaining difference?

Re: loan approval and equity

natasjlp — Mon, 29 Jun 2009 18:44:32 GMT

also, you mentioned a loan approval calculator? can you give me a link to a good one? I searched but only found mortgage payment calcs.

Re: loan approval and equity

Anonymous — Mon, 29 Jun 2009 18:51:22 GMT

Your mother would not be able to dive you the down payment. Even though a close family member can, the SELLER can not.

If it is a multiple unit place (apartments/condos) the rules are different (althouh I do not know them)

You would not be able to count rental income for qualifying because you have to prove rental history to do so.

Once again, althought it might be a great deal for you, you still have to be able to qualify for it on your own and since your mom is the seller, she can not help you (and it wold also disqualify you from the 1st time homebuyers credit if you were thinking of it). The bottom line is if yo can only afford to pay the taxes and maintenance and expect the entire mortgage to be paid out of rental income with both you and your mom living for "free" this is not sounding that secure.

If the whole point is just the upkeep, your mom should let you stay rent free and you take care of the renters and upkeep.

Re: loan approval and equity

ShanetheMortgageMan — Mon, 29 Jun 2009 18:57:43 GMT

You basically said there are at least 5 units, potentially more if you and your mom would be occupying units other than one of those 5. But also made mention of a house. So I am wondering what type of property is this? Is it a large house that just have 5 spare bedrooms, or is there actually 5 seperate entrances to 5 seperate units with their own kitchen, utility hookups, etc.? It is looked at differently depending on which type of property it is. Anything with 4 units or less is considered a residential property, more than 4 units is considered commercial. Further there are varying guidelines on residential depending on the amount of units the residential property has.

The ideal way from your viewpoint would likely be to use the difference in what the home would appraise for and what your mom would be selling it to you for to benefit in some way - and that can be done by your mom giving you a "gift of equity" to use as the down payment. Gift of equity is typically done in situations where the appraised value of a home will be much higher than the sales price, and the seller is also related to you in some way (legally, by blood, etc.). In your situation say the home is worth $750k, your mom only wants $400k, there is $350k in equity there. If you buy the home for $750k your mom only needs to get paid $400k, so you would just need to qualify for a mortgage of $400k, with your mom giving you $350k as a gift of equity towards the down payment, and you'd be at an end result of a 55.5% loan-to-value (LTV), which is very attractive for lenders. You said you could only qualify for a $250k-300k mortgage amount, how did you figure that out? It's usually best to estimate what you might get approved for but ultimately speak to a loan officer to find out if the numbers you are running are correct - or just post them here at the FICO forums and we can tell you. But if that is all you can qualify for then your mom would need to give you more of a gift of equity, or depending on the reasons your mom would be selling to you, perhaps you can just be added to the existing mortgage and refinance into both your names and avoid having to deal with the purchase situation.

Re: loan approval and equity

natasjlp — Mon, 29 Jun 2009 19:35:53 GMT

So, I work for myself and my income fluctuates and is not fixed. There are 2 buildings on the property, the main house is a residential and I think is zoned for a 2 family with 1 unit being rented right now for aprox $1500 a month. The other unit is a huge 2 floors and could easily be broken up into 2 units each bringing in $1500 per month per unit. the back building is a renovated barn with 2 floors and is zoned for business. the top floor is rented by my business currently for $1400 and downstairs could be rented for $1800 or be split up into 2 sections. each building has a spacious basement with plenty of storage room etc... There are separate entrances for each proposed and existing unit. We would take up 2 of these units ourselves - myself staying in the upstairs where my business is. There is a spare room for a bedroom I could let myself stay rent free - my mother we would have to figure out which unit she would want.

I like this putting my name on the mortgage and refi idea. Could we do that then say a year down the road take her off just leave me then I could refi again and just give her $$$K what ever we decide? backdoor so to speak?

Message Edited by natasjlp on 06-29-2009 12:35 PM

Re: loan approval and equity

ShanetheMortgageMan — Mon, 29 Jun 2009 20:14:48 GMT

In order for it to be considered a unit when the appraisal is done, and rental income is trying to be used to qualify, typically each unit has to have a kitchen, a bathroom, it's own entrance, and often have it's own utility hookup (gas meter, etc.). If the tenants in qualifying units are already in place, and since your mom has owned this property for at least 2 years I imagine, if you refinance together the rental income that will qualify will be taken from Schedule E of the tax returns your mom has filed, not the current leases (although current leases will be used to support the income from Schedule E), if this was a recently purchased home and tenants have not been there since the last tax return was filed, then the current leases may be used with a % taken away from expected vacancy/maintanence.

Your income will be taken from your tax return as well, most Schedule C expenses will be taken away from the gross amount, and the remaining amount will be used to qualify. You most likely will need to be self-employed/independent contractor (whatever you do) for 2 years as well.

In order to refinance together and later have your mom taken off, you will need to refinance it only in your name at that time, so if you are able to qualify on your own/sufficient equity remains then that could be an option. Doing a cash out refinance to pay off your mom is an acceptable reason.

Re: loan approval and equity

natasjlp — Mon, 29 Jun 2009 21:08:22 GMT

sounds good - thanks for the info. Right now we have 3 legitimate units - 2 in the main house and 1 in the back building. in order to add 2 new legitimate units we would need to install 2 kitchens, maybe a door or wall and door. Bathrooms and seperate entrances exist, but it is all oil and only 3 tanks for the 3 units, maybe raise rent and include utilities makes sense?

Now, do I need to qualify in order to be put on the mortgage as an additional name? And if not what prevents me from adding my name to the mortgage (approx $286K left) then just immediately removing my mothers and then I own it out right and refi? or immediately refi after I am added based on the equity and pay her (probably about 120k - 150k) then have her removed?

Re: loan approval and equity

ShanetheMortgageMan — Mon, 29 Jun 2009 22:34:11 GMT

You might not need to do any changes to the home and might be able to qualify on the income that is already being rec'd. But if you don't, then before I'd do any retrofitting I'd meet with an appraiser to put together a checklist of what you'd need in order to make them a legal unit, then once you have the items needed get estimates, and then devise a way to pay for it.

The borrowers on a mortgage need to qualify (even if being added), you alone might not qualify, but with a mix of you and your mom's income, debts, credit, etc. you must qualify. Since the situation is a bit complicated you are going to need to go over you and your mom's tax returns with a loan officer to determine how much income there is to qualify, and if not enough, then if you were able to add 2 more units to the property and be able to use that as income, if then you would qualify. Once you have done that part you can proceed with the rest of the plan.

Re: loan approval and equity

natasjlp — Tue, 30 Jun 2009 02:12:40 GMT

alright - I will definitely start on that path, thanks.

Could you expand on how adding someone to the mortgage works? there is aprox 286k left on the mortgage, does that figure into it? How much does my income/debt ratio count and how much do the units income count? Do I only need to qualify for half of the remaining mortgage like 143k?

I think I will add the additional units regardless (who wouldn't want the extra income?) and will definitely speak with someone about what we need to do about making them legitimate.

Re: loan approval and equity

ShanetheMortgageMan — Tue, 30 Jun 2009 03:43:02 GMT

Welcome. When you add someone to qualify for a mortgage all individuals debts, credit, income, etc. is taken into consideration to qualify all together - no individual has to qualify on their own, and no one person qualifies for a portion of the mortgage, everyone qualifies for it all.

Re: loan approval and equity

Anonymous — Tue, 30 Jun 2009 03:47:30 GMT

HI SHANE, DO I QUALIFY FOR FHA AND LOAN APPROVAL?

PRE-APPROVED GMAC

SCORES 567, 607, 614

INCOME $ 120,000 ANNUAL (LAST 3 YEARS)

RESERVES $30,000

ONLY MONTHLY IS AUTO FOR $534

RENT-FREE

NO LATES IN THE LAST 12 MONTHS

ALL BALANCES ARE $0

LOAN AMOUNT IS 255K

Re: loan approval and equity

natasjlp — Tue, 30 Jun 2009 14:19:40 GMT

alright so say I qualify for 0 nothing, not negative just nothing and my mother who is on the mortgage already doea qualify (and when you mean qualify - because she is already on it - qualifies for the mortgage remaining?) and I don't hurt our combined qualification. If I am then added, when could we remove her name?

I would definitely like more info about combined qualifying for an existing mortgage where there is a bunch of equity already.

Re: loan approval and equity

ShanetheMortgageMan — Tue, 30 Jun 2009 16:57:36 GMT

@natasjlp wrote:
alright so say I qualify for 0 nothing, not negative just nothing and my mother who is on the mortgage already doea qualify (and when you mean qualify - because she is already on it - qualifies for the mortgage remaining?) and I don't hurt our combined qualification. If I am then added, when could we remove her name? When you could qualify on your own then you'd be able to refinance the mortgage out of both of your names and into your name only... but if you are self-employed and qualify for $0 now, that usually means your income isn't sufficient, and in order to make your income sufficient you'll need 2 years of tax returns filed showing an average of the income you need to have in order to qualify.

I would definitely like more info about combined qualifying for an existing mortgage where there is a bunch of equity already. What info specifically?

Re: loan approval and equity

natasjlp — Tue, 30 Jun 2009 17:13:56 GMT

thanks for bearing with me. I am trying to understand how and what they are looking for in order to add someone. It sounds like if my mother already qualifies for the mortgage, then she could pretty much add anyone to the mortgage she wanted, granted that person is not a negative risk (which I am not even sure if that is possible).

Then a seperate question is if and when i am on the mortgage, how does the process of being qualified on my own work. Do I need to be qualified for the 286k left on the mortgage? how does qualifying for a refi differ? If I am on the mortgage how much does the equity to debt ratio count towards being 'qualified' on my own? How much does the shown income from the units count? Is it possible to qualify with no personal income (not my case, just want to understand the process) with a high enough unit rental income from the property?

I know a lot of questions, but i figure this is the place to ask - thanks!

Re: loan approval and equity

ShanetheMortgageMan — Tue, 30 Jun 2009 17:30:44 GMT

No worries, it sounds like you just need some specific help so being very specific in your questions helps people help you. Adding someone to qualify for a refinance isn't very involved at all, it's just like refinancing with only the existing person except for now there is 1 more person, just means documentation for both people will be needed, both will be evaluated... it's like refinancing with 1 person but times 2. When that new person being added to the mortgage is residing in the home that is being refinanced, the process is no more complicated than that. You are correct in your assumption in paragraph 1, if your mom already qualifies then as long as you don't bring on too much negative risk, then odds are you would both qualify if you went for the refinance together.

For paragraph 2, are you talking about when eventually you'd be refinancing in your own name, without your mother, down the road? Or are you talking about the refinance with both of you together?

If it's down the road, then whatever loan amount your mom needs you to obtain in order to pay off the existing mortgage + pay her what she needs (the reason she wants $400k if it'd happen now), if that is $286k or $400k, you would need to qualify for on your own (or if you are married/significant other you could add them to help qualify).

I believe the term you are looking for is "loan to value ratio" or LTV for short, the "debt to income ratio" applies to your income/debt payments.... the LTV need to be below a certain percentage depending on the loan program you are attempting to qualify for. When you are talking about refinancing and taking cash out, FHA permits an LTV up to 85%, VA (if you are an eligible Vet) permits 100% LTV, USDA only does rate/term refinances with no cash out (and you must already be in a USDA mortgage), and conventional allows cash out to 90% but because of other limitations 80% is the industry standard now. So given that your LTV, even if you were to have a new $400k loan amount, would be roughly 50%.... you are looking good. That is such a good LTV that it could compensate for other areas in your qualifying profile that aren't as strong, such as a slightly high debt to income ratio or perhaps blemishes on credit, or even lack of available reserves after closing.

If you scroll back I touched on the rental income part, if the property has been owned for at least 2 years the qualifying rental income will be taken off the tax returns (your mom's since she is the current owner), Schedule E to be exact... if the property hasn't been owned long enough to report the income on the tax returns then a copy of the current leases will be used and usually 25% of the rental income is taken off due to expected vacancy/maint. factors. If there is sufficient qualifying rental income to not need employment income to qualify then that is OK.