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.
Just when some lenders and real estate agents are saying underwriting is getting better, six Federal agencies are working to get tougher, stricter requirements for becoming a home owner passed into law. Here are three things they want:
1) Bigger down payment. They want you to make 30% down payment to get the best interest rate and best terms. Ouch! How many first-time home buyers have that kind of cash? This would force tens of thousands of borrowers to take a higher rate, even if they have great credit.
2) Stricter credit requirements. Even with the sub-prime loans far in the rear view mirror, they want even higher standards for credit. This will decrease home sales and home ownership, which is counter-productive to growing our economy.
3) Ban combo loans. They want to ban getting a second mortgage in combination with a first mortgage to avoid paying the monthly private mortgage insurance (PMI). So the strategy of putting 10% down, taking an 80% first mortgage with a 10% second mortgage to save money would become illegal. I have to ask, why are they trying to force everyone who doesn’t have 20% down into paying PMI?
The six agencies asking for this are the following:
1) The Federal Reserve
2) The Federal Deposit Insurance Corp.
3) The Federal Housing Finance Agency
4) The Dept. of Housing and Urban Development
5) The Office of the Comptroller of the Currency
6) The Securities and Exchange Commission
Who Does NOT Want Stricter Home Ownership Requirements:
1) The National Association of Realtors
2) The Mortgage Brokers Association
3) Builders
4) Mortgage Bankers Association
5) Private U.S. citizens
David H. Stevens, CEO of the Mortgage Bankers Association and a member of the coalition opposing the plan says, “We plan to be very clear and very vocal” in fighting this. I say, “You go, Mr. Stevens, and go strong!”
If you don’t want to see this 505-page proposal become law, please make your voice heard by contacting your state representation and saying you are against “QRM-Plus.” And please make others aware of this via Twitter, Facebook, email, and other means, because home ownership affects us all.
Mr. White, a renter, is buying a house from the Greens. The Greens are buying a house from the Blacks. Mr. and Mrs. Black cannot move out, because their loan is not closing due to the government shutdown. Because the Blacks’ loan isn’t closing, the Greens and Mr. White are also blocked from their home purchase transactions going through.
This is a true story, names changed. Because home buying is often a “domino effect,” the government shutdown is blocking more loan closings than it might appear on the surface. I’ll explain.
Lenders who sell their loans to Fannie Mae are required to verify the borrowers’ social security numbers and tax returns. The government agency that does the verifications is shut down. Some banks and mortgage companies are allowing their loans to close without the verification, with the stipulation that the verifications will be done as soon as the agency reopens. So even though the loans are closed, it still must be done. However, not all lenders want to take that chance.
If the verifications do not come back with satisfactory information, the lender must unfund the deal, which is a costly hassle. Lenders have their individual tolerance levels for taking such a risk.
In addition, the USDA loans (loans for certain neighborhoods with income limits) cannot close at all until the U.S. government reopens, so all those loans are in wait mode.
There is an even bigger financial domino effect on the economy when loans don’t close. The six real estate agents involved with the White, Green, and Black transactions are not receiving their commissions. The three loan officers do not receive their commissions. The three loan processors don’t receive their file bonuses. That is money they don’t have to spend on a celebratory dinner out, which affects the restaurant business.
Potentially, three moving companies lost income. New furniture and appliances will not be purchased. Pizza delivery for moving day is not happening. In turn, the people in the food and furniture industries do not have that income to spend on clothing and other things. On and on it goes with lost money to put into the economy. Experts say the U.S. economy has suffered by $2 billion so far due to the government shutdown, and the real estate industry is a part of that.
I don’t give political advice, but personally, I will not be voting for any incumbents at the next election. Let’s hope we get some good news from Washington D.C. soon.
I am not sure if I should ask for my Good Faith Estimate in the pre-approval process before finding the house to purchase or after the property is identified. I am about to make an offer. Can you clarify? ~ Chris
Yes Chris, here is the process you’ll want to follow for a smooth and secure mortgage experience:
1) Ask for a cost estimate or initial fees worksheet. This is the new upfront estimate that you can get without having your credit pulled or providing all your financial documentation.
2) Based on these estimate worksheets, choose your lender/loan officer.
3) Submit your financial documentation and have your credit checked by your chosen loan officer, so that you can obtain a solid pre-approval letter, in writing.
4) Go house shopping, with your pre-approval letter in hand, with your real estate agent. Your agent will need the letter when you submit an offer to buy a house.
5) After you’ve found a house and have a mutually signed purchase agreement, then you send that signed agreement to your loan officer, who will then adjust your loan amount, etc., accordingly and provide you with full loan disclosures. These loan disclosures include the 3-page Good Faith Estimate, Truth-in-Lending form, and other pertinent information about your loan.
If you need more personal help, please click on my webpage above that says, Review My Estimate.
Best wishes and happy house hunting!
Carolyn Warren
Loan sharks are still in business, lurking inside of what are supposed to be reputable banks and mortgage lenders. These are the liars who bait you with an Initial Fees Worksheet or Cost Estimate that looks like a good loan. When doing your comparison shopping, they appear to be the cheapest and best. The icing on the cake is their personal charm; loan sharks are famous for being good communicators.
A home owner refinancing in Southern California asked me to review the three cost estimates she received. The one from a direct lender in San Diego appeared to be the best, so she proceeded with her refinance. But two days later when she received her official Good Faith Estimate, she saw that every one of the fees had been raised.
The lender underwriting and processing fee? Higher by about $400!
The appraiser fee? Higher!
The credit report fee? Higher!
The flood certification fee? Higher!
The tax service fee? Higher!
I advised her not to sign the paperwork until all the fees were corrected. The loan officer quickly apologized and blamed his loan processor. But guess what? The next day when he came out to her home to get the loan disclosure package signed, the fees on the new documents were still higher than initially disclosed. He mumbled some excuses and explanations and told her to sign.
She refused to be a victim of bait-and-switch and sent him packing. She then chose to go with a different, more honest lender.
This was the right choice. A one-time mistake can be fixed, but try to raise fees a second time, and it’s time to move on to a better loan officer. In this case, I don’t blame the lender, but the individual loan officer. He quoted fees that were lower than the company allowed, presumably thinking once he baited in the customer, she would stay no matter what.
A home buyer in Seattle last week had better luck. He also used my review and consultation service, because he didn’t want to spend the time and hassle of shopping around.
“I figured I would get one estimate and if it looked okay to me, get your expert opinion,” he said.
The initial estimate looked just fine. The interest rate was at the best available rate for the day and there were no unnecessary junk fees. The lender’s fee was competitive. I told him to proceed with confidence, and if he had any questions when he received his loan disclosures, to let me know.
The next day he emailed me his official Good Faith Estimate, and right away, I spotted a problem. The appraisal fee had been raised from $450 to $500. I pointed this out to him and suggested he ask the loan officer to correct it. Happily, the loan officer fixed the “error” right away, and all was good going forward. Using my service saved him $50 (he hadn’t noticed the increase) and gave him peace of mind.
If you’d like an expert opinion on your own loan offer, Initial Fees Worksheet, or Good Faith Estimate, please see here. One of my clients called me “The Mother Theresa of Mortgages.” Needless to say, I was flattered. It’s good people who are trying to get good loans that motivate me to do what I do.
For self-employed people seeking a mortgage, either a purchase loan or a refinance: don’t make this common mistake!
When calculating debt-to-income ratio for the loan amount you desire, don’t use the wrong figure, or you might be in for a nasty surprise. It happens all the time…
Greg, self-employed in the construction business, reported his income to his loan officer as $95,000/year. With that, he figured he could easily qualify for a $400,000 loan. What he didn’t know was that the underwriter would subtract all the deductions he claimed with the IRS from his income. All construction materials, office expenses, wages paid out, the new truck he purchased–all deducted and all subtracted from his income. With this, his Adjusted Gross Income showed as $29,000, and that is the figure the underwriter used for qualification purposes. Much to his surprise and consternation, Greg’s request for the loan he wanted was denied.
The Adjusted Gross Income figure is the one you need to go by for self-employed income. Yes, depreciation and a few other things can be added back, but for simplicity, look at your Adjusted Gross Income.
Typically, self-employed folks hire good accountants to squeeze every legal deduction they can out of their income. That is fine. But realize you can’t have it both ways. You can’t get out of paying taxes on $95K and then turn around and claim $95K as your income when you want a mortgage.
The Take-Away here is to plan ahead. If you want to buy a house in the next year, speak with your tax preparer about making sure your income will qualify. And whatever you do, don’t go house shopping until you have a valid Pre-Approval Letter in hand that verifies the purchase price you qualify for.
Are you having trouble getting approved for a mortgage because of your self-employment? Here is a question asked by Justin on Directly.com (where I am a member):
I am an entrepreneur starting a new company (my third) and have been told by a mortgage lender that despite my successful background and ability to put 20% down, that I will have to wait two years before I can apply for a mortgage to show steady income. Are there any alternatives? I am buying in a highly sought-after neighborhood where the risk of the real estate market is considerably lower than most places in America.
My Answer For Self-Employed Home Buyers
Justin, the two-year self-employment rule comes from Fannie Mae and Freddie Mac, the two government-backed organizations (GSE) that provide money for mortgage lenders. The majority of banks and other mortgage lenders use this money; therefore, they must comply with their rules. So even if you have been making $2million/year for an entire year, are putting 35% down, and are buying in the best neighborhood in America, you will not be able to qualify for a mortgage that is backed by Fannie or Freddie money until you have a full 24 months self-employment history.
But, if you can find a lender that has their own, non-GSE money, then you have a shot at getting approved–with a good Letter of Explanation to accompany your loan application.
Another option would be to find a private seller who is willing to carry the contract (act like the bank) himself until you have the two-years. Some sellers don’t need all their cash up front and would like to make 5% to 8% on a short-term loan.
With this information, you will know what to ask right upfront. That way, you’ll save yourself and the loan officer time and emotional stress. The last thing you want to do is to apply all over the Internet, letting lender after lender, pull your credit report, because too many credit report pulls does not look good and present a red flag, in spite of the credit bureaus’ rule that multiple pulls over 30 days won’t hurt your score.
Can you imagine?! You pay off your mortgage (either by refinancing or selling the property), and even though you have a $0 balance, the lender keeps on charging you interest every day for the rest of the month.
“Can they do that?” you ask.
Yes, FHA (Federal Housing Admin) is and has been doing that to all their first time buyers who used their 3.5% down FHA loan.
This sneaky practice netted FHA an extra $587,000,000 in revenue–in one year alone, according to an article in the Washington Post by Kenneth R. Harney. Over the years, it’s added billions to their coffers.
What this amounts to is a prepayment penalty. If a home owner pays off their balance before the end of the month, they are penalized for the “early payment” and still have to pay their entire month’s payment. However, this is not disclosed to people up front. In fact, most of the time it is a BOLDFACE LIE. On the Truth-in-Lending form (TIL) near the bottom where there is a box to check yes or no for a prepayment penalty, the majority of banks and lenders check no prepayment penalty.
By contrast, conventional loans and VA loans stop charging their borrowers on the day the loan is paid off.
The National Association of Realtors has been complaining about FHA’s prepay penalty for years — to no avail. But now the Consumer Financial Protection Bureau has added its muscle to the fight, and it looks like the FHA might be forced to stop grabbing extra dollars out of their customers’ wallets. However, the CFPB has given FHA a year to comply with their request, so we’ll have to wait to see how it all plays out.
In the meantime, if you are paying off an FHA loan, plan your closing for the end of the month so you don’t pay any (or many) extra days of interest payments.
On your mortgage estimate, you might see a credit for several thousand dollars to be used toward closing costs. I’ve been asked, “Is this legit? Is this real? Where does that money come from?”
To answer, when a lender gives you an interest rate higher than par rate, there is an extra profit, or extra cash that can be given to you as a credit. Par rate is the base rate that does not yield extra profit to the lender nor require money (charged in percentage points) to buy it down. Par rate changes daily.
A perfect example is a set of two mortgage estimates I reviewed yesterday for one of my coaching clients. The lender had given him these choices for a 30-year fixed rate, 10 percent down payment, top tier credit:
Choice #1
3.375% with a cost of 0.4 percentage points. For his loan amount of $405,000, that was a cost of $1,701.
Choice #2
3.75% with a lender credit of $8,059. That would give him over eight grand to pay his closing costs. The lender had that much money to give, because 3.75% was over the par rate of 3.4% (on that day).
Which is Better?
The difference between these two loan offers is $9,760. (A cost of $1,701 versus a credit of $8,059.) Talk about going from one extreme to another!
First, I do not recommend paying $1,701 to get an interest rate one eighth of one percent (0.125%) lower than par rate. For his loan amount, it would take five years just to break even on that cost. That is too long, in my opinion. Also, he happened to be tight on money for closing costs after he made the 10 percent down payment, so why would he spend so much extra to buy down his rate? Better to keep that money in an emergency account.
I recommended asking for 3.5% with zero cost. This is because 3.5% is the closest rate to par rate for the day (yesterday). Depending on the day he locks in, there may or may not be a small credit, depending on exact par rate.
However, if he found that his dream house — the one he and his wife fell totally in love with and absolutely had to have — took all of his cash for the down payment, leaving him without enough left for closing costs, then taking the higher interest rate (and higher monthly payment) so that he’d get the big lender credit to cover closing costs was a viable option.
Personally, I would rather see him take 3.5% par rate on a more affordable house with a lower monthly payment.
But for a person with a low debt ratio and high income, the higher interest rate is not a turn-off, and the lender credit is an advantage one might choose to take.
By the way, if you read Mortgage Rip-Offs and Money Savers, you know this lender credit is the Yield Spread Premium (YSP). Per new lending laws, if a lender is charging an origination fee (including processing fee, underwriting fee, administration fee, application fee), then any YSP they receive must be given to the borrower as a credit. However, if the lender is a bank or a direct lender using their own money to fund the loan, they do not have to reveal or credit you any extra profit they make. And don’t bother asking, because they will never tell you what their overage/profit is. Most will deny it altogether, because as a bank or direct lender, they don’t call it YSP; they call it SRP (Service Release Premium).
If you have any questions about lender credit, please feel free to ask. And once again, thank you for stopping by to read my blog.
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.
