The one who holds the money makes the rules.
If the underwriter says your debt ratio is too high, you will be denied. (And be forewarned: the spreadsheet you made showing you can afford it means nothing. The underwriter will not give it a moment’s glance.)
As I mentioned in a previous post, your loan officer can calculate your debt-to-income (DTI) ratio for you. But what if you want to do it yourself? What if you want to double-check the loan officer? Here’s how it’s done.
1) Take your gross income (before taxes and other deductions). Use the highest figure on your W-2 forms. You must have been employed in the same line of work for the last two years in order to count the income. If you have a brand new part-time gig, it won’t count. If you have brand new bonus income, it won’t count.
For self-employed people, use the Adjusted Gross Income near the bottom of page one of your tax returns. Again, you must be self-employed for the last two years. If you have a new business, you cannot count your self-employment, even if it is in the same line of work as your previous W-2 job.
2) Add up your monthly outgo. Use all of the minimum payment obligations that show on your credit report. If you pay your entire credit card bill each month, you do not use that balance in your outgo; instead, use only the minimum payment required.
Do not count expenses that do not show on a credit report such as phone, utilities, cable, gas or bus, or grocery.
Add in the new proposed mortgage payment for the house you want to buy. Include principal, interest, taxes, insurance, and monthly mortgage insurance if putting less than 20% down. (You can use the easy calculator at MortgageHelper.com here.)
3) Divide your total outgo by your gross income. This is your DTI. Most mortgage lenders want to see a max of 38% DTI, but some will go higher if the rest of your application is strong. The highest I’ve seen is 49% DTI with a 800 credit score and significant cash reserves.
For example, if your gross income is $5,000/mo. and your outgo is $3,000/month:
5,000 divided by 3,000 = 60 DTI. That is too high and will be denied.
You would then need to pay down debts and/or choose a less pricey house.
By knowing your price range, you avoid the disappointment of being denied. And again, if it seems too complicated to calculate yourself, all loan officers at mortgage companies and banks are happy to do it for you. They love using their handy HP calculators, so don’t hesitate to ask.
Happy house hunting! It’s a good time to own your own home.
That’s an interesting question, but more important is how do you avoid paying those over-priced closing costs, no matter what state you are in?
It is my pleasure to tell you that I see Good Faith Estimates from all over the U.S., and from all types of lenders: banks, brokers, credit unions, and other direct mortgage lenders. None of my clients (and I expect that none of my book readers either) are paying the new higher fees stated in this report.
None! They’re too smart for that. They keep more of their cash in their own bank accounts and shell out less for inflated origination costs padded by junk fees.
Five Most Expensive States for Mortgage Fees
1) Texas: $2,280 average origination fee
2) Alaska: $2,195 origination fee
3) New York: $2,109 origination fee
4) Hawaii: $2,009 origination fee
5) Wisconsin: $2,035 origination fee
There is no reason to pay so much! This is approximately double what my clients are paying for origination in those states.
The most expensive states I see for origination are California and New York where my folks are paying about $1,200 on average. Who’s paying $2,280 in Texas? Some vulnerable folks who are being taken advantage of, that’s who. I know a good Texas lender that charges a flat fee of $900 and not a penny more.
Five Least Expensive States for Mortgage Fees
47) District of Columbia: $1,791
48) Ohio: $1,707
49) Missouri: $1,749
50) Tennessee: $1,746
51) Nevada: $1,570
Too high, all of them! I like to see the origination fee for these least expensive states at $800 or less.
How Do You Pay Less?
It’s not hard to pay less and keep more of your money in your own pocket. Simply use the loan shopping method in my books. It’s in Mortgage Rip-Offs and Money Savers and in Homebuyers Beware. Make three phone calls and ask one question. That’s it. The only change for 2014 is that instead of asking for a Good Faith Estimate, ask for a Cost Estimate, because lenders won’t give out a GFE unless they pull your credit report first, and you don’t want that.
Why Have Origination Fees Gone Up?
The report states that lender origination fees (including the admin. fee, application fee, processing fee, underwriting fee, doc prep fee, and miscellaneous junk fees) has increased by a 9% in the past year. Why?
There are two reasons.
1) New federal mortgage regulations are costing lenders more time, and time is money.
2) Borrowers have been lulled into a false sense of security, thinking that the government involvement in the mortgage industry has protected them from being ripped off (which is not true). Therefore, they neglect comparison shopping.
It’s not hard to save yourself $500 to $1,00 or even more. If you don’t want to or can’t take the time to read one of my books, then you can take advantage of my personal coaching service. If I don’t like your loan, I will find you a better one that I do like. Information is here. Watching the video testimonial is optional. Scroll down to read the details.
Only You Can Bring Down Lender Fees
When borrowers say no to the banks and mortgage companies with the high fees and choose to do their business with the good, reasonably priced lenders, they control the market. The over-priced lenders will be forced to lower their fees or starve. It’s that easy, and you have the power to do it.
If you know someone who is considering buying a home or refinancing, please do them a favor by passing along this information. Thank you.
To see my source for the annual Bankrate report, go here.
Emily Johnson found the perfect house for her family. Four bedrooms, three baths. The master suite had a garden Jacuzzi tub, just what she needed after a long, hard day of work. There was plenty of street appeal, too. After hours of looking on the Internet, she’d found The One.
Her next step was to contact the real estate agent who was listing the house and ask to see inside.
Emily fell in love.
That evening, she brought her husband out to see the house, and he agreed with her that it was just what they wanted. They asked the real estate agent how they could make an offer. And that’s when everything fell apart.
You see Emily, like so many other house shoppers, had done everything wrong — starting with her initial search.
What Went Wrong?
When you want to buy a house, your first step is not searching the Internet for what you want. Your first step is to find out how much house you can afford. That way, you can tailor your search to what is appropriate and realistic. What’s the point of falling in love with a house that is out of your price range? Why set yourself up for disappointment?
A pre-qual is a quick evaluation by phone. The loan officer will ask you a couple questions about your income, outgo and down payment, then give you an estimate for the loan amount and home price you can qualify for.
No credit check is needed. To make sure your credit report is not pulled without your authorization, do not give out your social security number.
Once you know your true price range, you can cruise the Internet to your heart’s delight. By looking at homes you can afford, you set yourself up for success and avoid heartbreak.
Seller financing is when the seller allows you to make payments directly to them, bypassing the bank and Fannie Mae. If the seller does not need all their cash immediately, they might be happy to let you make payments and collect the interest for themselves.
Here is how a typical seller-financed loan works:
1) Most sellers will carry the contract for five years. After that, they want to be cashed out. Thus, the loan is amortized for 30 years with a 5-year balloon payment. This gives you the lower payment a 30-year loan would have, but at the five-year mark (or sooner), you would refinance with a bank loan. This gives you plenty of time to get your credit and debt ratio in compliance with Fannie Mae underwriting.
2) Make sure there is no prepayment penalty so you can refinance sooner than five years, if you choose.
3) A typical interest rate for seller financing is 8% to 10%. Remember, the seller is taking a risk that the lender was not willing to accept, so you have to pay for that. This is also why you want to refinance out of seller financing as soon as you can, preferably after one year. On a short term loan, interest rate is not as significant as for a long term loan.
You should have a real estate attorney write up the contract. It should include the amount owed, the interest rate, the principal and interest payment, that it is a fixed rate, that there is no prepayment penalty, what day of the month the payment is due with a 15-day grace period, and what the late penalty is if you are late (typically 5% of the payment). It should also spell out the terms of the 30-year amortization and 5-year balloon payment. Do not sign the documents unless you completely understand all the verbiage.
You should also hire an appraiser to verify the value of the home and a home inspector so you know exactly what the condition of the home is. Do not bypass these important steps.
Seller financing is not for everyone, but it has worked very well for others. One home buyer who could not qualify for bank financing, due to a bankruptcy that was less than two years old, was able to work out seller financing at only 5%. That enabled them to get into a home of their own sooner, and they were very happy as a result.
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.
Interesting question! Especially since more data is collected nowadays than ever before. Here is a list of personal information that lenders collect and the reasons why.
8 Things Your Lender Will Ask When You Apply for a Mortgage
1) Age. A person must be at least 18 years old to qualify for a mortgage. It is illegal to discriminate based on age. Thus, a 95-year old can get a 30-year loan. It is illegal to charge young borrowers or old borrowers more based solely on age.
2) Race/Ethnic origin. It is illegal to discriminate or charge certain races/ethnic groups more than others. In Mortgage Rip-Offs and Money Savers (p. 211), I tell how some lenders get around that regulation and why minorities often pay more–as well as how you can prevent that from happening to you.
On the loan application, there are boxes to check for your race/ethnicity. One of the boxes says you prefer not to give that information. However, if you check the non-reveal box, the loan officer is required by law to take a guess and check one of the boxes. For people who are of mixed race, loan officers often get it wrong. Or if the loan officer isn’t good at telling whether you are Italian, Hispanic, or a Pacific Islander, you could easily have incorrect personal information in your file. Maybe you don’t care; it is up to you to decide whether to let the loan officer take a guess or to state the information yourself.
3) Marital status. This information is required, because in community property states it is illegal for a married person to sign for a mortgage loan without the spouse knowing about it. The non-borrowing spouse must sign documents of acknowledgement and consent, even if he or she is not on the loan contract or title.
4) Sex. On the loan application, there is a box for male or female. The purpose is for government agencies to verify that lenders are not charging women more than men. Lenders do not ask or care whether you are straight, gay, or other. So when you see an ad that says, “All people accepted here,” that is not special to that institution. The law says all people are accepted at all lending institutions.
One of my coaching clients said his Realtor told him and his partner to go to a certain mortgage bank “because they accept gays.” The Good Faith Estimate he received was an over-priced loan. I told him that all lenders accept gays; and in fact, they don’t ask and they don’t care. Knowing this enabled him to go get a better priced mortgage.
5) Number of dependents. This refers to number of dependents under age 18. If you’re supporting an elderly relative or a 22-year old college student, you need not include that person as a dependent, because it is considered voluntary. On the other hand, children must be cared for, and the number of dependents you support is a factor is determining the allowed debt-to-income ratio. A family of ten needs more money for groceries than a family of three, so more disposable income is required.
6) Income Verification. You must show you have enough income to handle all your current obligations plus a new mortgage with taxes, insurance, and the monthly mortgage insurance fee, if applicable. The current guidelines say your debt-to-income ratio should be no more than 43%; however, there are exceptions.
7) Two-year employment history. Income stability is an issue. For self-employed people, your business license must be at least two years old. If you’re thinking of quitting your salary job and making a go of your own business, buy a home first or wait two years. It is acceptable to change jobs within that two-year period, so don’t pass up an opportunity for advancement. The “No Employment Required” loans of the sub-prime era are gone.
8) Asset Verification. Lenders require two to three months’ statements showing assets. You must verify where your down payment money is coming from. If it is gift money, that must be verified. No secret side loans for your down payment! No taking a cash advance on a credit card for your down payment! And, you’ll need to have some cash reserves left in your account after your loan closes, so you can’t use every last dollar you have.
In addition, a lender may ask for anything and everything else they believe they need.
Sometimes borrowers ask, “Do they really need that?” And, “Why do they need that?” Or, “Can they ask for that?”
Those are valid questions, and you have the right to know. Feel free to ask your loan officer why. A good, experienced loan officer should be able to answer your questions. If they don’t know the answer, they should offer to ask the underwriter and then let you know. Underwriters don’t speak with borrowers directly; that is your loan officer’s job.
If you have more questions or comments on this topic, feel free to ask. I promise to answer. You’ll see the comment button at the top right of this column.
“The burden of trying to comply with the (new) regulation is just overwhelmingly costly for a small financial institution,” she said.*
Her credit union is not the only one who is being strangled to death by the new laws. Last Friday, the government agency set up by the White House — ironically called the Consumer Financial Protection Bureau — enacted yet another new rule that favors the Big Banks and forces more little guys out of the mortgage business. These are the small, local, squeaky-clean lenders that are honest, efficient, competitively priced, and help keep their communities employed.
Look at Michigan Mutual, a company that employes 300 citizens. They, too, are feeling the squeeze. “There are going to be loans that we did in 2013 that we are not going to be able to do in 2014,” said chief executive Mark Walker. “We’re going to be very conservative just to make sure that we’re in compliance and don’t get into trouble.”
I’ll explain what he’s talking about.
Under the brand new “qualified mortgage” standards, approval guidelines will be more strict. The debt-to-income ratio is being lowered, which will negatively impact the following types of borrowers:
— Self-employed people.
— People who rely on tips for income.
— People with income from Internet sales, such as eBay and Etsy.
— People who do side jobs, such as child care, fixing cars, and yard work.
— People who do home party type of sales.
— and others who have income outside the W-2 box.
So forget what you’ve read about underwriting guidelines becoming more reasonable. They’re actually going in the other direction now. The new rules have got lenders scared that their loans won’t be accepted by Fannie Mae and Freddie Mac, even if the borrowers have excellent credit and a history of paying what they owe.
The new standards — not set by people who are experienced in mortgage lending, but by the CFPB committee — make it more difficult for lenders to sell loans to investors such as Fannie Mae and Freddie Mac. The wealthy Big Banks, such as Wells Fargo and Bank of America, can afford to keep a portion of their loans for 30 years on their own books without selling them in order to free up money to make more loans. In fact, those two banks have already said they plan to continue to issue loans outside of the new CFPB standards and keep them in-house. But the little guys cannot afford to do that. Therefore, making loans has just become riskier for them. So risky, that some are quitting mortgage loans altogether and others are significantly cutting down on the loans they will do.
Why is the government agency favoring the Big Banks over small lenders who, by the way, have a cleaner history of mortgage lending with fewer foreclosures?
Peter Carroll, CFPB’s assistant direction for mortgage markets had this to say about the new “qualified mortgage” rule: “I think we got the rule right.”
Really? That’s what you think, Mr. Carroll? Perhaps you should talk with Linda Sweet and Mark Walker and then think again.
* Big Valley Federal Credit Union of Sacramento, CA, is not closing for all business. President Linda Sweet said they will mostly stop making mortgage loans in 2014.
Source for quotes: REALTOR Magazine
(FHFA was established by the White House after the mortgage meltdown. Their mission is to ensure a safe mortgage market by setting rules for government sponsored enterprises. Think Fannie Mae and Freddie Mac.)
There are two mortgage fees they said would increase in 2014:
1) The Guarantee Fee. This is a fee charged by Fannie Mae and Freddie Mac for bundling, servicing, and selling mortgage-backed securities to investors. More detail is here. This fee increase was going to be passed on to mortgage borrowers, home buyers.
2) Credit related fee increase. A fee for having a credit score below the top tier. In other words, a charge to offset the risk of lending to you if you don’t have “A” credit. Currently, top tier credit in the mortgage world is 740, but they have proposed raising that to 800.
After the announcement, the Mortgage Bankers Association sprung into action in protest. They are actively working with policy makers to prevent a pricing increase for home buyers that could hurt our fragile housing market.
Just because we have seen some recovery, it doesn’t mean the market is robust and can withstand a punch in the gut like a major fee increase. So the issue is being reviewed now. We’ll have to wait to see how it all plays out.
What is the Loan Limit in Your County?
In the meantime, some counties with higher median home prices than average have suffered a loan limit reduction. I blogged about this possibly happening earlier this year, as you might recall. In the highest-cost areas where the loan limit was $729,750, the limit has been reduced to $625,500. Here is the link to the look-up table for FHA loan limits by county.
You are invited to sign up to this blog to receive important information about mortgages and home buying in 2014. I blog once a week, usually on Tuesday, so you aren’t flooded with too much in your in-box.
In neighborhoods where the median price of homes is higher than the national average, loan limits are higher as well. This enables buyers to purchase a home in a higher priced area of the country (such as coastal cities) without having to take a high priced jumbo loan.
The current limit for a high cost area is a loan of $729,750. However, that is set to end December 31, 2013.
The loan limit would then lower to $625,500.
Will Congress act to extend the high loan limits?
Since there are no crystal balls for mortgage, no one knows for sure. What we do know is that December 31 is not that far away, so if you’d like to purchase a home with a loan in the higher range, you might want to act now just to be safe. Contact your local Realtor who will act as your buyer’s agent to preview homes and negotiate a contract for you.
When taking a large loan, it’s more important than ever to get the best rate and terms. Recently, I helped a home buyer save over $2,000 in upfront fees when he used my Review and Coaching Service. For information on how you can have me review your cost estimate or Good Faith Estimate with a telephone consultation, click on the page above that says “Review My Estimate.” Because I do not do loans myself, I am an unbiased expert source, working on your behalf.
Even though any loan officer can pre-qualify you for a loan amount, ultimately, it is your responsibility to decide how much house you can afford. I once heard a mortgage sales manager tell his staff of loan officers to qualify their people for a higher mortgage than what they’d originally asked for.
He said, “If they buy a more expensive house, they will be happier.” Of course, his real motivation was for bringing in larger loans, not for their happiness.
But here’s the thing. Even if the home buyers were happier at first with their larger, fancier houses, how happy were they later when they discovered that their house payment was preventing them from going out to dinner and a movie? It’s not fun being a slave to your mortgage.
A good loan officer who is your advocate will never push you to get a bigger loan than what you’re comfortable with.
Unfortunately, just as often it is the home buyer who is pushing the loan officer to get them qualified for more than they should. This happens after they tour dream houses that are slightly above their price range. They fall in love with a house and think there must be a way to get into it.
This is partly why the mortgage industry created bad loans, such as the 2/28 teaser loan that had a low payment for the first two years and then went up, and negative amortization “pick a payment” loan that turned toxic for so many. A large number of these loans became unaffordable, causing the people to go into foreclosure. And we all know how that affected the U.S. economy!
Even though printed guidelines say your debt-to-income ratio should be 28% for the mortgage and 38% for both mortgage and other credit obligations, in reality, most lenders do not follow those rules. It is common for debt ratios to be pushed to 45% and some will go to 49.99%.
If your debt ratio on paper is 49%, but your real debt ratio is much lower because you have income that the lender won’t include, then taking the higher payment might be justified. For example, some people have a side business selling on eBay, at swap meets, or other venue. The lender might not include that business income for various reasons, so the lender’s calculated debt ratio might be higher than your reality.
How to Calculate Debt Ratio
To calculating your debt-to-income ratio (dti), use your gross income, before any deductions. Include the new, proposed mortgage payment, including property taxes, insurance, and mortgage insurance (if applicable) along with auto loans, student loans, credit card payment minimums, and anything else that shows up on your credit report. In general, the max dti for all expenses should not exceed about 35% to 40%. Stay on the lower end if you have children to support or if you like to spend a lot of money on entertainment, shopping, etc. and need a higher disposable income available after your mortgage payment.
If you’re not sure how to do this, any loan officer can help you with this calculation.