Disappointing Mortgage Pre-Qual...What can I do about it?

[Anonymous]

I just turned 20. I'm self-employed with 5 years of tax returns. My income last year was $60k. I don't have a co-borrower. I have a couple years of credit history but my only debt is my car loan ($49k balance). My car loan makes my DTI 16%. My current credit score is in the low 700s. I took poor advice 6 months ago and applied for some new cards. I went from 3 to 9. I plan on combining or closing some in the coming months. Across all my cards, I currently have $34,300 in available credit. 

SO...

I went through the mortgage pre-qual process a couple months back to see where I stand. I'm opting for USDA (0 down) or FHA (3.5% down) or the HomeOne program (3% down). I currently have $8,000 put away for a home. My goal is minimum $19,500 (3.5% down + 3% closing for $300k home) to $20k or $25k. Needless to say, I'm a little disheartened about the numbers I got:

• Local bank approved me at $105k under the USDA program.
• Same bank said they could approve me at $130k w/ a conventional loan. 
• USAA came back at around $160k.
• US Bank came back at $214k (no idea how big of a down payment).

I've been looking dilligently for the past year and literally no home has been listed under $200k in the area except for a handful that are unlivable around the $150k mark (we're talking dilapidated trailers and major fixer-uppers that no one would finance). I've always planned on shopping in the $300k range.

I plan to buy a home in 12-15 months. But, now I'm starting to worry because I thought I was way closer than I appear to be. This forum has been a huge help to me over the years. Please tell me: Am I being unreasonable? Is it my income? My self-employment? My credit score? I would greatly appreciate any advice on what I can do in the next year or so to get approved for a $300k loan or above. Thanks in advance!

[Anonymous]

It is income/down payment. Standard models say your home expense should not exceed 36%. I ran some quick numbers and at your income that’s an $1800 month payment. (These are just quick rough numbers and banks will take a lot more into consideration).

So to get to an $1800 mortgage on $60K income on a $300,000 house you need to put down about 12%. Again let me stress these are just rough numbers, there are programs out there that will go above the 36% number. This is just to give you an idea why the banks numbers are far off from what you wanted.

A couple of more things. Real estate is on the upswing. That may not be the case in a few years. You have time on your side (20 yo7). If you spend the next few years saving a bit maybe even your income will increase a bit you will find that housing prices will be more to your liking when you’re ready to buy. 

Also see if you can find some local real estate groups. (Be careful you don’t get pressured into buying too soon!) Local groups know about the undiscovered areas you don’t know about. That areas that’s 100k less that will be the hot market in few years when everyone else finds it.

[Anonymous]

Try this calculator. It will let you run different scenarios 

https://www.mortgagecalculator.org

[tcbofade]

You don't state which area you are looking in, and that's OK.  Keep looking!

Wife and I purchased a $250k home for $118k via short sale in 2013...because we were the first offer. 

Keep your eyes open. 

[Anonymous]

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@Anonymous wrote:

It is income/down payment. Standard models say your home expense should not exceed 36%. I ran some quick numbers and at your income that’s an $1800 month payment. (These are just quick rough numbers and banks will take a lot more into consideration).

So to get to an $1800 mortgage on $60K income on a $300,000 house you need to put down about 12%. Again let me stress these are just rough numbers, there are programs out there that will go above the 36% number. This is just to give you an idea why the banks numbers are far off from what you wanted.

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Thank you so much for your input! I'm definitely willing and able to save for a bigger downpayment if that's what's needed to buy in this area. What really got me down was that the USDA program allows up to 41% and, even with that, the first bank only pre-qualified me for $105k through the USDA program. 

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@Anonymous wrote:

A couple of more things. Real estate is on the upswing. That may not be the case in a few years. You have time on your side (20 yo7). If you spend the next few years saving a bit maybe even your income will increase a bit you will find that housing prices will be more to your liking when you’re ready to buy. 

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The reason why I'm looking to buy in the next 15 months is because the area's rent is $1,500 to $2,000/month--nearly the cost of a mortgage. Thus, continuing to pay rent for years feels wasteful to me.

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@Anonymous wrote:

Also see if you can find some local real estate groups. (Be careful you don’t get pressured into buying too soon!) Local groups know about the undiscovered areas you don’t know about. That areas that’s 100k less that will be the hot market in few years when everyone else finds it.

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The home prices span most of the county because homes are coveted for being either near the lake, near the river, or near the ski resort and we have a lot of people moving in willing to pay the prices too. There are some small older neighborhoods where things are cheaper. So, I am keeping an eye out! Shopping out of this county isn't a consideration due to some personal reasons though. 

My plan is to keep saving and hopefully be ready to jump in on some new listings come next spring. At this point, I'm torn between saving more more towards the home purchase or diverting some to paying down my car loan so I can refinance it (and get a lower interest rate and monthly payment) this fall. That would help lower my DTI too. 

[Mortgage-Specialist]

Is 60k your gross income or is that how much you net after write-offs? If your $800 current car payment is your only monthly payment then your debt ratio looks like it would work right now for FHA (under 56.9%) That is the max allowable debt ratio for FHA even though most lenders do not abide by that. 

[Anonymous]

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@Mortgage-Specialist wrote:

Is 60k your gross income or is that how much you net after write-offs? If your $800 current car payment is your only monthly payment then your debt ratio looks like it would work right now for FHA (under 56.9%) That is the max allowable debt ratio for FHA even though most lenders do not abide by that. 

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Wow! $60k is my gross income. I didn't realize FHA went up so high for the DTI ratio. I figured USDA (41%) would be one of the highest. I'll definitely look closer at the FHA program as a consideration. 

[Mortgage-Specialist]

If youre self employed, lenders will not use your gross. Unfortunately, they will all use your net income (after-write-offs) which is usually significantly less and becomes an issue for many self employed borrowers. 

[Anonymous]

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@Anonymous wrote:

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@Mortgage-Specialist wrote:

Is 60k your gross income or is that how much you net after write-offs? If your $800 current car payment is your only monthly payment then your debt ratio looks like it would work right now for FHA (under 56.9%) That is the max allowable debt ratio for FHA even though most lenders do not abide by that. 

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Wow! $60k is my gross income. I didn't realize FHA went up so high for the DTI ratio. I figured USDA (41%) would be one of the highest. I'll definitely look closer at the FHA program as a consideration. 

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I'm on the same self employment boat claiming as many ride offs to avoid paying taxes but then on the other hand screw myself for loans. They are going to take your average adjusted gross income(taxable income after all deductions) on the last 2 tax returns . This is probably why those limits are so low.

[VALoanMaster]

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My plan is to keep saving and hopefully be ready to jump in on some new listings come next spring. At this point, I'm torn between saving more more towards the home purchase or diverting some to paying down my car loan so I can refinance it (and get a lower interest rate and monthly payment) this fall. That would help lower my DTI too. 

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This is probably the best way to get yourself into a higher purchase price range.

I just ran a scenario for a client who was ready & willing to put 40K down on his purchase but when I ran the numbers for him & he found out that it would only lower his mortgage payment by $180, he decided to pay off one of his cars instead which saved him over $500 per month.

How much did you make after all of your write offs the last 2 years?

What kind of deductions did you take?