Assume you rent an apartment and drive an old car, and you would like to upgrade your life style.
Question #1: If you have to choose between buying a house or a truck, which do you choose?
Question #2: Assuming you can afford to buy both a house and a truck, which one do you buy first?
Before we look at the answers…
A True Story: A young gentleman finished his credit repair work and raised his credit score to 640. This qualified him for the FHA Elite loan for home buyers.
He felt great! He was excited.
So he ran straight to the auto dealership and bought himself a brand new 2018 Chevy Tahoe. (MSRP $47,500)
Then he drove home and called his mortgage loan officer. “I’d like to get approved to buy my first home,” he announced.
So the loan officer took the application and ordered his credit report–and bam!–he got declined.
“Why?” he asked, totally stunned.
His new truck purchase dropped his score from 640 to 565. Too low for any of the first-time home buyer programs! Too low for the FHA 3.5% down payment program!
Not only that, but with a hefty new payment, he no longer qualified for the purchase price he needed anyway.
Maybe the Tahoe is so luxurious, he’ll be happy living in it. (Bad joke, sorry.)
Let’s See How You Did on the Quiz
Answer #1: Buy the house. Real estate is going up in value. You can increase your personal wealth by owning a home. A vehicle goes down in value the moment it become “used.”
Answer #2: Buy the house first, always, even if your credit score is 800. A higher score and a lower debt ratio will qualify you for better, cheaper financing.
The house is more important than the truck. Buy your most important item first (not the easiest to get).
I welcome your comments. Thank you for sharing this with others and on social media. Too many people are shooting themselves in the financial foot by purchasing a vehicle before the home.
If you’re a first-time home buyer (or haven’t owned real estate in the last three years), ask your loan officer about “The 97 Loan.” The down payment required is only 3%, and it’s a cheaper loan than FHA’s first-time home buyer loan.
Too often, banks and other lenders push the FHA loan, and here are two reasons why:
- The FHA loan is a big profit-maker for lenders.
- Loan officers think about the 5 percent down conventional loan and forget about The 97 for first-time buyers.
Compare FHA to “The 97”
FHA has an upfront mortgage insurance fee of 1.75 percent. The 97 has no upfront fee.
FHA’s monthly mortgage insurance fee lasts forever. The 97 Loan’s MI fee can get dropped when you have 20-22 percent equity.
FHA down payment is 3.5%. The 97 Loan is 3%.
How to Qualify for The 97 Conventional Loan
- Credit score must be at least 620. (Some lenders want 640.)
- Bankruptcy must be discharged for 24 months.
- Debt-to-income ratio should be 43% max, based on gross income (before deductions).
- Maximum loan amount is $424,100. Maximum price is $436,216.
Getting Together the Down Payment Money
The down payment money may be from your own verified funds or from family. Unverified cash is not allowed, meaning get that dough out of your safe into a bank account now.
You can also get creative and borrow money from your retirement account. Or, you can sell something like a car or motorbike, as long as you show the bill of sale and matching deposit receipt into your bank account.
Enough already! Pick up your phone. Tell your loan officer you want to get pre-approved, then call your real estate agent and go find a home to call your own!
If you’re in California or Washington, click here to reach me.
Please share this with others who want to become a home owner.
Imperfect credit? Be encouraged with this success story.
Two days ago, I closed a loan for a lovely couple whose credit suffered all due to an uninsured driver slamming into their car so hard, it knocked the husband unconscious and threw them both in the hospital, fighting for their lives.
Naturally, they could not carry on with their business during this time, so they ended up with a state tax lien and a medical collection on your credit report.
Now that they’ve recovered and are back to work, they were approved for a conventional loan (better than FHA).
In addition, because they had not owned a home in the last three years, they got a first-time homebuyer’s program with a .125 lower interest rate.
- Down payment required was 3 percent; although, they chose to put down more to get a smaller loan and payment.
- They did not have to pay off the collection account.
- They did have to pay the state tax lien, and that was easily done by adding to the cash-to-close. The closing agent collected the funds and paid the state at closing. This way, there was no complication with getting the proof that it was paid, and it saved them the hassle of doing it early.
The loan closed in only 28 days. Pretty good for our busy market!
Better Interest Rate
As a loan officer for a full service mortgage lender, I have the option of using our own company money or brokering out the loan to a wholesale lender. By brokering out, they got an interest rate of 3.875% rather than 4.25%. This saves them $37 per month and $444 per year.
Congratulations! They are in their own home just in time to enjoy the gorgeous autumn leaves and upcoming Thanksgiving holiday.
If your credit has some dings, you may still be able to become a home owner. If you’re in WA or CA, I’d be happy to take a look for you. Contact me here. If you’re in a different state, check in with your local full service mortgage lender who will have more choices for you than a big, stuffy bank or fussy credit union.
If you would like to become a home owner but know (or fear) that your credit will not qualify, here are some facts about getting an Federal Housing Admin (FHA) loan:
- Perfect credit is not required, but lenders prefer to see that you have been paying creditors on time for the past 12 months. That shows you have put difficulties of the past behind you and are now on track with your finances.
- You can get approved 24 months after a Chapter 7 bankruptcy is discharged.
- Medical collections can be ignored, because they are too often the fault of the insurance companies.
- Other collections, up to a total of $2,000, can be ignored.
- The down payment is 3.5 percent of the purchase price. If you don’t have the cash but have family who is willing to help with either a gift or a loan, that is allowed.
- Closing costs may be paid by you, by a family gift, or by the seller. Or, the lender can credit you toward closing costs in exchange for a higher interest rate.
- Most lenders require that your middle credit score is 580 or 600, depending on how strict they are.
Where Do You Get a FHA Loan?
You get a FHA loan through a mortgage lender. I recommend going to a full-service mortgage lender, because they have more options than a bank or credit union, often close faster, and because I work for a full-service mortgage lender and think they are the best!
What If Your Credit Doesn’t Qualify?
If your credit score is too low or if you have credit blemishes that need to be repaired, may I suggest a handy do-it-yourself guide that won’t cost you an arm-and-a-leg? Credit repair is legal and good folks are doing it and becoming home owners. For example, I am closing a loan for a lovely couple who got tired of paying high rent and will now own a three-bedroom home that includes a big garage with a workout room and half bath — with a smaller monthly payment than their rent. To check out the credit guide, click here.
Thank you for reading my blog. Please feel free to subscribe (see top right) and pass this info along via social media, because a lot of people think their credit is not good enough to buy a home when it is! Perfect credit is not required for home ownership!
Do you know someone who would love to stop renting and buy their own home? A new study says 79% of Millenials want to buy a house. This study, by Bloomberg, goes on to tell them they can’t save fast enough for a down payment. I am here to tell you that I disagree! Why?
Bloomberg’s chart shows how many years it takes to save 20 percent down.
But who says you have to make a large down payment? It is not required.
Here are tips for buying a house when you can’t save fast enough for Bloomberg.
- If your credit score is 720+, take a 3% down conventional loan.
- If your credit score is 580 – 719, take a 3.5% down FHA loan.
- If your family is able to give you gift money for a down payment, you’re ready to go.
- If you are a U.S. Veteran, you may qualify for zero down.
- Use one of the many down payment assistant programs offered by your state. For example, I have a program in WA that will cover your down payment plus kick in a little for closing costs. You can earn up to $97,000/year to qualify. When you sell the house (or refinance), you pay back the down payment out of the proceeds. This is an interest-free loan to help more people enjoy home ownership.
If home values continue to increase next year as fast (or nearly as fast) as they did in 2015, you are better off buying now than waiting until you can save for a larger down payment.
Also consider that home owners receive the best and biggest tax deduction available. Typically, a home owner can deduct the interest portion of their payment plus property taxes. This lowers their tax bracket, potentially saving significant taxes. (Speak with your CPA for tax advice.)
If credit score is your barrier, then pick up a copy of Repair Your Credit Like the Pros here and get to work. Earlier today, I heard from a lovely young woman in Ohio who followed the book’s directions and is now applying for a home loan. Yes, credit repair works! But you must do it properly, like the credit attorneys and certified credit professionals.
What barrier is keeping you from the American Dream? Post a comment (see top of this article) or send me an email here. I promise to reply.
How much have home values increased in the past year? Has real estate been a good investment?
If you are in Colorado, your home value has increased by 12.28% (on average).
If you purchased a $400,000 home with 5 percent down, your $20,000 investment has grown to an equity of $49,120. You have more than doubled your money in only one year! (Not cash in hand, but by wealth in real estate.)
$400,000 x 12.28% = $449,120 value
The Federal Housing Finance Agency has released this annual appreciate by state for 2015:
No one can predict what 2016 will bring. The best reason to buy a home is simply because you want to own the space where you live and sleep. You want to stop paying your landlord’s mortgage and pay your own. You want the joy of home ownership! In the meantime, if owning real estate also increases your personal wealth, then that is great, too.
If you are a real estate agent who would like to be on my Recommended list, send me an email here.
If you’re buying a home in California or Washington state, I would love to provide you with excellent pricing, no junk fees, and stellar service.
Recently, one of the Big Banks announced it is rolling out a new program: 3% down with no monthly mortgage insurance fee.
At first glance, it sounds amazing– or does it? My first thought was, this sounds like lender paid MI, which has been around for a long time, rolled out with a new name. I’ll explain.
When you put less than 20 percent down (conventional loan), it is riskier for the lender. Typically, the lender uses a mortgage insurance company (such as MGIC, Radian, Genworth) to protect them in case you default on the loan. You, the borrower, pay for this, and you have choices.
- Pay a monthly fee (fee amount depends on your credit score and how much down).
- Pay it as an upfront fee in the closing costs.
- Ask the seller to pay it as an upfront fee, one of the seller-paid closing costs.
- Pay a percentage upfront and the rest as a lower monthly fee (called split MI)
- Have the lender pay MI.
But hold on! Will your lender, out of their kind and generous heart, pay your MI fee for you?
Sure, if you take a higher interest rate to cover it. Which essentially amounts to the same thing as option #1 above. But it sounds good, right? Lender-paid MI.
Having no MI sounds good, too. But if the loan program carries a higher interest rate, what’s the difference? Good marketing, plan, Bank of America. Put a new label on an existing program and then make a media splash.
Are 3% Down Loans Risky?
Some folks are asking if this is subprime lending all over again. As a loan officer who worked in both retail and wholesale lending (inside closed doors of an institution that provided money to mortgage lenders), and who wrote Mortgage Rip-Offs and Money Savers to warn the public about the scams and lies, I will say this is not subprime lending all over again, but it is moving the pendulum from the super-strict end of the spectrum to more leniency.
Right after the mortgage meltdown, 3% down conventional loans were discontinued. You had to put down at least 5%, and the credit score requirement became stricter. Or, you could take a 3.5% FHA loan. (FHA promptly raised its Upfront Mortgage Insurance Fee. It was 1% and today it is 1.75%. In addition, the monthly MI fee increased.)
In reality, the 3% down conventional loan has been available again in 2014. Many lenders require a credit score of 720.
This “new” 3% down with no MI program that is rolling out by Bank of America (and backed by Freddie Mac) requires a credit score of 660. But all full-service lenders (such as Envoy Mortgage where I work) already have a 3% down loan with a credit score requirement of 620; it is called HomeReady, and it is backed by Fannie Mae. You get the five choices for covering MI that are listed above.
This gives me an idea. Maybe I should announce that there is a new loan program available, only from me, myself, and I. It’s called The Spring Homebuyer’s Special. It is 3% down and you get five choices for MI. Woo-hoo everybody!!! Call for a press release and help get my name out there, right next to Mr. Big Bank.
Many thanks to Jared, who suggested I blog on this topic.
I love California, and I am excited to announce that I am licensed to do mortgage loans in the Golden State. Whether you are a first-time home buyer, a seasoned home buyer, or a home owner refinancing, I can help you get the best loan for your situation.
Here are some of the loan programs I can help you with:
* First-time home buyer FHA loan with 3.5% down or with gift money for the down payment.
* Grant money for the down payment on an FHA loan with no pay back whatsoever. A true grant, from a private bank. No neighborhood restriction.
* Conventional loans: 30-year fixed, 20-year fixed, 15-year fixed, 10-year fixed rates.
* 5/1 ARM: fixed for the first five years, then adjusts annually. A good loan for people who plan to keep the home for five years or less.
* VA loan for U.S. Veterans
Getting Pre-Approved is No Cost
There is no cost to get pre-approved and/or to find out how much house you qualify for. Let me know what you want, and I will take it from there.
What Does It Mean to Be “State Licensed”?
Loan originators who work for banks and credit unions do not have to be state licensed. The CFPB assumes the bank will vouch for their integrity and competence. However, mortgage brokers and direct lenders (such as myself) have to pass multiple hurdles in order to do business in California. Here are the requirements we go through that those at banks and credit unions get to skip over:
* 20 course hours plus additional class hours for California state law.
* Pass both a national test and a CA state test.
* Get fingerprinted and have a background check done.
* Have a credit report pulled and checked for personal financial responsibility.
* Be approved by the CA state authority.
You might say that state licensing ensures a higher level of scrutiny, which means more security and peace of mind for you.
Please feel free to contact me about your mortgage questions or financing needs via the Ask a Question page here.
Looking for a Recommendation for a Licensed Real Estate Agent?
I have worked with fine real estate agents in California. If you would like my recommendation for an agent who will work hard and put YOUR best interests first, send me a message here.
1) Stay in town during the loan process.
This is not the time to travel so that you are unavailable to provide additional documents the underwriter might ask for. If your vacation to Europe was pre-planned and cannot be changed, then allow ample time after you return home before the closing date. It is unrealistic to think you can check out during the loan processing and come back to sign one day later.
2) Leave your money where it is.
Do not transfer funds from one account to another during the loan process without your loan officer specifically instructing you to do so. In addition, do not transfer funds the two months prior to applying for a mortgage. The reason is because doing so can cause a paper-trail nightmare for you and the underwriter.
3) Leave your credit as is; open no new accounts.
If you open a new credit card or installment loan during the loan process, you are potentially sacrificing your home. Don’t do it! Although your credit has been checked and approved, it is likely your credit will be checked again right before closing. If new accounts appear, then your debt ratio and/or your credit score could suffer.
One first time home buyer decided to buy new appliances for the new home during the loan process. When her credit was re-checked, the new Sears account showed up and the payments put her debt ratio over the line. Her loan was denied! In order to proceed, she had to return the appliances and prove with receipts that she had done so. How embarrassing, right?
The same goes for buying a new automobile. Don’t even think about it! Your priority must be buying the house.
4) Write your purchase offer contingent on a home inspection.
Waiving a home inspection is a dangerous move. Inspectors are paid to find fatal flaws and major problems that are not obvious to the eye. When you visit a home, do you climb up on top of the roof? Do you crawl under the house? Do you inspect the electrical wiring, plumbing, water heater, sump pump, etc.? That is what your home inspector is for. It is an important step that prevents you from having to shell out thousands (or tens of thousands) of dollars later.
5) Obtain your own buyer’s agent.
Calling the real estate agent listed on the for sale sign is a colossal mistake. The same goes for using the agent that is hosting the open house. When you use the seller’s agent, it is like using your opponent’s attorney in a court of law. Who would do that?! The seller’s agent is required by law to get the highest price and best terms for the seller. Dual-agency is not in your favor!
Since the seller pays for both the listing agent and the buyer’s agent, it is free to you to have your own expert agent representation. Therefore, there is never a reason not to do so. You do not save money or get a cheaper price on the house if you use the seller’s agent. Be smart and get your own agent representation.
Or, “Can I take a cash advance on my credit card to help with my down payment?”
The answer to both questions is no. Your down payment must be either your own money or gift money from family or grant money from an acceptable source. No part of your down payment can come from a loan, not even from your mom. No exceptions.
If a family member is providing cash toward your down payment, then they will need to sign a form letter stating it is a gift and no repayment is required. Usually, they also need to show the source of their gift money by providing a bank statement(s) or other document such as investment statement.
Why can’t you take a loan from your parents for a down payment? Because the lender thinks that if you get into financial trouble and have to make a choice between paying mom and dad or the mortgage bank, your family ties will be stronger and the bank will lose out. Therefore, it is an unacceptable risk to lending. The bank is not going to take “second position” behind your family.
Any other loan, such as a cash advance from a credit card, is also unacceptable. This would affect your debt ratio as well as put the bank at a higher risk for getting paid.
For a small down payment of only 3.5 percent of the purchase price, look at the FHA loan. FHA allows all of your down payment to be gift money from family.
If you are eligible for a VA loan, you may qualify for a zero down loan.
The no-down sub-prime loans of yesteryear are gone, and I think that’s a good thing. It takes time and discipline to save for a down payment and closing costs, and that’s not a bad thing either.