Can We Qualify?

[settleordelete]

We've out grown our current home and want to move to a quieter more suburban area. Our current home value is $303,000 and we owe $165,000 on it and the mortgage is principle and interest only at 831 a month (Property Tax and Insurance is paid separately at the end of the year). Our combined income is $158,000 a year. The only other debt we have is my credit cards which is near 45,000. We checked our mortgage scores here,  703 to 718 for me and 793 to 806 for her. That's because I carry all the debt on my credit. No derogatory, no latest, no car payments, no judgements.

The home we want cost $425,000. We want to get preapproved / prequalified on Monday. We will of course sell our home to pay off the current mortgage and CC debt. We have about $27k saved we can use toward the  cost or pay off debt.

The lender the home builder uses says his rate for FHA is 3.99% and his Conventional rate is 4.75%. We want to go conventional.

We want to know what are chances before applying for a mortgage?

Or do we need to wait and just payoff debt and save more money?

Thanks in advance for any advice on this matter.

[ShanetheMortgageMan]

Keep in mind the 3.99% FHA and 4.75% conventional rates could very likely just be temporary.  It's called a 2/1 buy down, meaning your interest rate is 2% lower the first year, 1% lower the 2nd year, and then it adjusts to the normal interest rate in the 3rd year.  There is a cost to it though and the cost is the difference in the amount of interest you pay between the temporary lower rate and your eventual permanent interest rate, that cost is due at closing, so the seller (builder in your case) needs to pay for that cost for you to see any benefit.  The builder pays for that by giving you a closing cost credit in the same amount.  Make sure they are doing that.

Alternatively you can ask them to give you that same credit for a permanent interest rate buy down, the rate won't be as low as the 3.99%/4.75% but the lower interest rate will be permanent and won't increase in years 2 and 3.

Any lenders can offer you these options, it's not just exclusive to the builder's lender, however the credit from the builder might be contingent upon you using their lender which would be a big advantage.

When you do the temporary buy down you still qualify at the eventual final interest rate, so you'd be qualifying at a 5.99% rate for FHA and 6.75% for conventional.

That said, your $158k of income shouldn't have any problem qualifying for the $425k sales price with 5% down using conventional financing, assuming all of your debt will be paid off through the sale of your home.  Your debt-to-income ratio should be around 30% which qualifies for pretty much any loan program.  You could even still have around $1,500/mo in consumer debt payments and still qualify.  I wouldn't be concerned.  

[settleordelete]

Thank you Shane,

We appreciate your advice and wisdom on this subject. 

[settleordelete]

Here's an update,

We closed on our new home last Tuesday morning in about 1 hour. So, It took a while longer to get this deal through, dealing with appliance repairmen, realtors, home inspectors, appraisers, roofers, email after email, call after call, tons of documents to sign and print, sign again and print, then of course the highly motivated buyer of our old home which was the easiest part. 

But because the builder was lagging behind on other homes and we demanded a redo of a few things that didn't pass our inspection or the FHA guidelines, it push our closing from Oct 1, to Oct 8. Best to be prepared for that. We leased our old home from the buyer after we sold it until we closed and moved everything out. Also, we used some of the cash  from the sell of our old home to pay off debts. Our rate from the new lender is 3.99 (FHA) 30 year mortgage with PMI that falls off in 2034. The lenders loan from the approval process to the clear to close notification was quite easy even with that amount of CC debt. I can't begin to tell you how skeptical I was about this even working.

Thanks.

[ShanetheMortgageMan]

Congratulations and glad it all worked out!

[settleordelete]

Thanks again Sir.