Should You Take Out a HELOC to Pay Off a Mortgage?
Those who understand the basics of a HELOC, or home equity line of credit, tend to sing its praises. They know just how useful those loans can be when you’re trying to remodel your house or have unexpected expenses. But what about using a HELOC to pay off a mortgage? Is this even a good idea?
Since a HELOC is a loan that uses the equity in your house as collateral, it makes sense that you’d want to use it to pay off your mortgage. That would ideally leave you with one single loan. However, there are several pros and cons here that need to be gone over before.
Heloc Vs Mortgage
Before we can start going through the pros and cons of using a HELOC to pay off a mortgage, we first need to explain the differences between these two loans. Although there is no clear winner when comparing HELOC vs mortgage, as both have their good and bad points, both of these loans are quite different. A HELOC is a loan that’s taken out on the equity in your home. This is the amount that’s available when you subtract the amount that you owe on your mortgage from the overall worth of your home. A mortgage, on the other hand, is a loan that’s taken out in order to purchase or refinance a home. Those funds are set into a fixed loan for that single purpose. This makes it quite different than a HELOC, which is designed kind of like a bank account in that you can use the money, pay it back, and then use it again. For this reason, some people wonder if they could use a HELOC to pay off a mortgage. You can always check out our site for these types of tips, or a reputable HELOC information site to keep up to date. The concept of going down to this one single loan is quite appealing. Before you start to contemplate HELOC vs mortgage, it’s important to consider the following points.
How Much Is Left On Your Mortgage?
One important thing to think about before you make your HELOC vs mortgage choice is whether or not you have the funds available on your HELOC in order to pay off your mortgage. Plus, you need to understand that the closer you are to paying off that mortgage, the more your payment amounts go straight to the principle. However, if the overall worth of your home has gone up considerably and your mortgage is fairly small – yet has years left to go – then you could use a HELOC to pay off a mortgage.
Are You Eligible for a Heloc?
Another factor is whether or not you’re eligible for a HELOC as far as your credit is concerned. If you received your mortgage more than seven years ago and have damaged your credit rating since then, you may not be able to take out that additional loan. In this case, then you clearly won’t be able to use a HELOC to pay off a mortgage. This leaves the mortgage as the best option when weighing the HELOC vs mortgage loans.
Other Pros and Cons
On top of the responses to those two questions, there are some additional pros and cons that must be considered when trying to choose whether or not to use a HELOC to pay off a mortgage. Let’s work through them one by one.
Pros
Cons
The Decision
When trying to choose whether or not to use a HELOC to pay off a mortgage, it’s really up to you. There are a number of different factors, some of which can help you choose which is the most important to pay off first – HELOC vs mortgage. Both have their own sets of pros and cons, although the HELOC is much more flexible.
Hi, I am Bob Rutledge with New American Funding a progressive and customer oriented Mortgage Company. I have been a Mortgage Loan Officer for over 2 Decades, I have closed 1000s of mortgage, I have experience as a Mortgage Underwriter too. I specialize in First Time Home Buyer Programs, Renovation and Construction Mortgages, and knowing the best mortgage options, programs and guidelines to provide the best to my clients. I concentrate on making more options available to home buyers! When we work together you will find that I answer all questions, sometimes before they are asked. I prefer to be available to you as much as my family and life will allow, I am accessible to you via my cell 314-913-9678, text, or email bob@bobrutledge.com, or you can visit my website at www.bobrutledge.com.
THE RENOVATION MORTGAGE EQUITY PLAN
How you can purchase a new home with the lowest down payment possible and greatly increase your equity while making your new house your home!
Are you a FUTURE HOME BUYER? Are you looking to purchase a house that will provide you with instant equity? It is what every new home buyer wants! It is possible to find that house if you search hard and long! But, you can shorten that search with the Renovation Mortgage Equity Plan.
Have you been looking at the houses on the market and feeling a bit let down? In today's current housing market every day there are home buyers purchasing a new home and settling for less than what they wanted. Why is that? The current market of available homes is made up of mostly very dated homes, foreclosures, distressed properties, aged and outdated houses! That perfect home is very difficult to find if not near impossible.
Here is the scenario that many home buyers are finding, they are first pre-approved by their mortgage loan officer for what in most cases is a standard 30 year fixed rate mortgage, FHA Conventional, VA or USDA. These are all great mortgage program, you are pre-approved for what you asked for or what your mortgage lender provided you.
Then the home buyer goes looking at and for the houses in the areas they prefer to live, what they find is not what they had hoped for. Sure, the houses are in the neighborhoods, school districts, and areas desired, the houses are the types of homes the home buyer want. The yards are spacious, it’s a ranch, it’s a two story, it has a basement, a garage, it’s what they were looking for except for one thing, it needs a lot of work to make it livable or for that matter what they would want to wake up to every day. So the home buyer goes on looking, and looking, and looking, eventually they end up settling or they continue renting.
There are several mortgage programs available to all home buyers that will allow you to purchase that near perfect home, and turn that ugly duckling home into the beautiful swan that you want. But, what if I told you that not only will these home loan programs allow you to transform any house into that home to be proud of, but within a very short time, months, you can have a home that has doubled, tripled or more in equity.
The FHA 203k mortgage, the Fannie Mae HomeStyle, and VA Renovation mortgages are all specifically designed to provide a home buyer, with the means to fund the repair, rehabilitation and renovation of their near perfect house into the home of their desires. The renovation mortgage will roll into one loan the sales price of your near perfect house and the cost of making it your dream home, I will not get into these home loans in-depth here. If you would like to learn more about the FHA 203k mortgage, the Conventional HomeStyle, or the VA Renovation Mortgages please visit my website at www.bobrutledge.com where you will find all you need to know.
NOTE the FHA 203k mortgage is not the same as the standard FHA 203b mortgage, not all lenders can provide the FHA 203k mortgage which is one of the reasons they do not offer this program to home buyers. The same can be said about the VA Renovation Mortgage and the HomeStyle Renovation Mortgage to an even greater situation. Not all lenders do these types of mortgage programs and most Loan Officers lack the experience you want.
I successfully work with a home buying team every month that will help several home buyers find and secure the home of their dreams using the FHA 203k Renovation Mortgage, the VA Renovation Mortgage, or the HomeStyle Renovation Mortgage in conjunction with the Renovation Mortgage Equity Plan. So much so that I encourage ALL my home buyers not to buy a new home until they find THE house that can quickly turn their LOW down payment into at least a 10% equity stake. In most instances my first time home buyers will have established that 10% to 20% equity stake within three to six months after closing on their new home, even in today’s declining, stagnate, or barely growing house market.
HOW DOES THE FHA 203k EQUITY PLAN WORK
Start with the development of your team, your team will consist of a real estate agent, a mortgage loan officer who is experienced, knowledgeable, and able to do ALL renovation mortgage programs, and a home remodeling General Contractor. Don’t be concerned if you do not immediately have a general contractor available to you, more than likely your real estate agent or loan officer will help you. In many instances the Loan Officer will know the perfect Real Estate Agents and/or General Contractors to refer you to.
Are you willing to do your HOME WORK? I hope so, because the Renovation Mortgage Equity Plan can and will place thousands upon thousands of dollars worth of equity into your home. Equity in your home is the best and generally the most important wealth many of us will accumulate.
To start your real estate agent should be well versed and experienced in putting together a reliable and accurate Comparable Market Analysis, CMA. Your real estate agent should have a very solid knowledge of the housing market in the area you want to live, and last your agent should have a true desire to see you get the absolute best home on the market.
Next, your loan officer should have all the renovation mortgage programs available to them, make sure they have done many renovation mortgages because these home loans are a lot more involved than the normal mortgage. In the hands of an inexperienced lender a renovation home loan can turn into a home buyer’s nightmare. In the right hands the FHA 203k mortgage is fairly easy and will not take more than another couple of weeks to close than a normal mortgage, I usually ask for 45 to 60 days to close.
The general contractor should have experience in home remodeling, renovation and repair work. They should be aware that the renovation mortgage will pay them through an escrow account that will not provide funds to them until work is proven to be complete. The contractor should have a very sharp pencil, meaning that they know how to create thorough and accurate estimates. Last, the contractor may have to visit several houses with you, providing estimates of work, make sure they are willing to do this for you.
Your HOME WORK should include that YOU have your renovation mortgage loan officer team member insure they provide you with a complete working knowledge of the renovation mortgage you will be using and that they PRE-APPROVE you for that mortgage program. The pre-approval will establish the limits of the total loan amount, it also provides you with a virtual wheelbarrow full of money, when you make an offer on your new home the seller will know you are a home buyer to be taken seriously.
Now that you are pre-approved, have your real estate agent team member provide you with a list of candidate houses, these will be homes that match what you are looking for in a home, have all the appearances of a bargain home, priced below the market, and may need some TLC to get the house to be your home.
Drive by and visit the houses with your real estate agent, take with you a note pad and a camera. At every house you visit take extensive notes on the house, note the repairs you feel need to be made, develop a wish list of what you would like have done to the house to make it your home. Are the appliances outdated, you can have them replaced with a renovation home loan. Is the flooring hideous, worn, spotted, shag carpeting, a renovation mortgage can cover that too. Would you like a bigger garage or a garage period! Whatever you can dream of more than likely can be done with a FHA 203k, HomeStyle or VA Renovation home loan. If the house is empty or you have permission take pictures of the house to help you remember that house later.
Keep in mind that your have a real estate professional as one of your team members, ask for and listen to their suggestions and allow them to point out the good and the bad. Your real estate agent is a fountain of knowledge and wants to see you get that great bargain home with a ton of equity potential.
Next, whittle the number of houses to your favorites and most potential homes. Go back and revisit the houses on this new list with your contractor team mate in tow. At each home provide your contractor with your notes and your wish list for that home. Let the contractor do their thing, finding items that need attention or repaired, and have them make suggestions as to remodeling and your wish list. Be taking notes of everything from this visit too. Before you leave that house or very soon after have your contractor provide you with an estimate of cost to make this house your home.
Add the sales price of the house or what you are willing to pay for the house and the estimated cost of repairs does it come in below the amount that your loan officer approved you for? Ask yourself this question; can I see this house as my home? If so, you are ready to move on to the next step. This next step will determine whether you make an offer on the house and for how much. Now that you have established the cost of purchasing this house and bringing it up to what you want in a home have your real estate agent perform a bulletproof CMA based on the repairs, work, and remodeling you will do for this house.
Does the Comparative Market Analysis, CMA, show that this house has the potential to meet your minimum gained equity after your down payment? Yes or No, if yes then keep going. If No, don’t be concerned there are a lot more potential homes out there and coming on the market
Based on the findings of your real estate agent’s work, the CMA, this will determine whether you make an offer or not. Also, it establishes your negotiating start and and end positions. You know the value this house holds so do you can start low and have a stop point OR you make a higher offer and negotiate seller concessions to help reduce the out of pocket cost of purchasing a new home. This is why you have a real estate professional, they are trained and experienced in negotiations.
When using the Renovation Mortgage Equity Plan never buy a new home that doesn’t have at least 10% Equity Potential!The Renovation Equity Plan has helped many home buyers gain near instant equity wealth as well as protect the new home buyer from a declining housing market. In this current housing market a home buyer with a very small down payment can quickly see their investment turn into a situation in which they are more equity rich soon after all the renovation work is completed!
Another advantage of the Renovation Mortgage Equity Plan is that many home buyers are finding that they are gaining a 20% or more equity position which allows them to refinance, soon after the completion of work, to a new mortgage with a lower interest rate and no mortgage insurance. Just the elimination of the required monthly mortgage insurance payment can lower a house payment by 10 to 20 percent. Now you have a home with equity and a lower house payment!
PUT YOUR TEAM TOGETHER TODAY TOMORROW START YOUR HOME WORK
My name is Bob Rutledge and I specialize in renovation mortgages, I am a Certified Renovation Mortgage Specialist, and I close renovation mortgages every month. Most mortgage lenders cannot say that.
I have the ability to close FHA 203k, VA Renovation, and HomeStyle Renovation loans all over the State of Missouri, quickly, easily and with far less stress. I have worked with home buyers and owners not only in St. Louis and the surrounding area, but in Kansas City, Springfield, Cape Girardeau, Columbia, Sikeston and other towns in Missouri.
I am also licensed in Texas, Ohio, Florida, and Illinois. I am quickly gaining experience in these states as well.
We are licensed in 48 states and many of the United States territories. If I cannot help you with your renovation mortgage needs I can refer you to someone that I trust.
If you need help with a renovation mortgage, have questions or would like to apply for a renovation mortgage please free to contact me. Email me at FHA203kbob@gmail.com
Are you about to start the home buying process? Are you currently in the process and you feel overwhelmed with the process of home buying? You’re not alone. Homebuyer surveys find that more people today want to buy a home, but challenges such as saving for a down payment and student loans are keeping them sidelined.
We know the vast majority of buyers (92 percent) use online search at some point in their home buying process. Maybe that’s how you found me at www.bobrutledge.com!
But, before you start picking out your dream house online, take a minute to make sure you grasp these 7 key facts about homeownership.
1. Go back to school (for a day). We know you probably just Goggled “how to buy a home,” but did you know there are homeownership education courses that can really help you prepare? Homebuyer counseling is occasionally required when using a down payment assistance program, but any buyer can benefit. You’ll learn about the home buying process, improving your credit, mortgage terms, planning a budget and more. Plus, a new study finds that by simply participating in these in person or online courses, you’ll reduce your risk of foreclosure by 42 percent.
2. Get an agent. If you aren’t yet a homebuyer, there’s no reason not to have a real estate agent. Your agent’s commission will come from the home you purchase, not your pocketbook. Everybody wins! Even if you don’t think you’ll need help with lots of showings, a real estate agent will help you navigate contracts between you and the seller and set up important things like the home inspection. As a new buyer, you’ll benefit from the expert help.
3. Find the right lender. (PICK ME) Your mortgage lender will help you secure your home financing—and, there are many types of banks and lenders who can help. Unfortunately, according to the Consumer Financial Protection Bureau (CFPB), nearly half of homebuyers don’t shop around for a mortgage lender. Like you, your finances and home buying goals are unique. So, it makes sense to shop around and interview your lender for the job. Find a lender that can work within your parameters and not their own, too many lenders will make YOU
4. Your credit score matters. The type of loan you get, including interest rates and points paid, is primarily determined by your credit score. The better your credit score, the more affordable loan you can get, often with more options for a low down payment. For low down payment loans, your MIDDLE credit score needs to be a minimum of 620. Review your credit report, make adjustments and get prepared so you can enjoy the lowest interest rate possible and save cash over the life of your loan.
5. You don’t need 20 percent down. You may have heard or read that you need 20 percent down. It’s not necessarily a bad thing, but that’s just not the case. And, if using a low down payment can get you in a home now (instead of 3 years from now), you’ll enjoy low rates and get out of a rising rent situation. Low down payment options have been around for a long time. In fact, data shows that low down payment loans with sound underwriting (loan is fully documented, income verified) are just as successful as loan with large down payments.
6. Down payment programs offer savings. Did you know the average down payment assistance benefit is more than $8,000? Many homebuyers don’t know about homeownership programs that can help them get in a home much more quickly and provide a valuable cash cushion for other home buying expenses. You could save on save on your down payment and closing costs, or even get ongoing tax credits. If you would like to see how a low down payment mortgage and down payment programs can help to get you into a new home with zero out of pocket expense follow this link to my ZERO PROGRAM.
7. Don’t forget to budget closing costs. Most buyers focus on saving for a down payment, but your closing costs can run you another 3 to 5 percent of the sales price. It’s important to factor in those costs so you are prepared for the closing table. Ask your agent about negotiating those costs with the seller. In addition, some homeownership programs can help you cover your closing costs.
(1) Shopping for a house before a mortgage
It is so much more fun to look at homes than it is to talk about your finances with a lender. So that’s what a lot of first-time home buyers do: They visit properties before finding out how much they are able to borrow. Then, they are disappointed when they discover they were looking in the wrong price range (either too high or too low) or when they find that right home they scramble to get financing, and the mortgage is not something you want to rush or put too little of time in to. In today’s housing market you want to show home sellers you are a serious buyer and able to make a serious offer when you find that right home.
How to avoid this mistake: Talk to a mortgage professional about getting pre-qualified or even preapproved for a home loan before you start to seriously shop for a place. The pre-qualification or preapproval process involves a review of your credit, income and expenses. Having a per-qualification/pre-approval letter in hand will make your offer more competitive, and most offers today must have this letter.
(2) Not looking for first-time home buyer programs
As a first-time home buyer, you probably don’t have a ton of money saved up for the down payment and closing costs. But don’t make the error of assuming that you have to delay homeownership while saving for a huge down payment. There are plenty of low-down-payment loan programs out there.
Besides low down payment mortgage programs there is a lot of down payment assistance programs available to first time home buyers. Many times the funds that are available to you from DPA (down payment assistance) Programs will cover your entire down payment. Even if you have saved enough for a low down payment mortgage program keeping your savings in your pocket will allow you to pay with cash for the items you need for your new home. I see too many home buyers use credit to purchase new home items, increasing your monthly credit obligations just after purchasing a new home.
Visit my website at http://www.bobrutledge.com/MODPA to learn more about what is available in the State of Missouri!
How to avoid this mistake: Ask a mortgage lender about your options. You might qualify for a Veterans Administration or U.S. Department of Agriculture loan that doesn’t require a down payment. Federal Housing Administration loans have a minimum down payment of 3.5%, and some conventional loan programs allow down payments as low as 3%. Ask about down payment assistance programs as well. Do your own homework too, search for DPA programs in your area.
(3) Not hiring a buyer’s agent
Too many home buyers make this mistake! Do not make the mistake of working directly with the seller’s real estate agent, who was first hired and obligated to secure the best price and terms for the seller. Do not be persuaded that a Real Estate Agent can negotiate in all fairness to both sides, it is impossible. As a novice home buyer, you could be overmatched when negotiating with an experienced agent who’s working on the seller’s behalf.
How to avoid this mistake: Work with an exclusive buyer’s agent, who has a duty to work in your best interests. If you do not know a real estate agent, seek out referrals from your friends and family. But, if you are working with a Mortgage Lender they will know many qualified real estate agents in the area and especially an agent who will fit your needs.
(4) Using up all of your savings
If you buy a previously owned home, it almost inevitably will need an unexpected repair not long after. Maybe you’ll need to replace a water heater, repair a crack in the chimney or get rid of hidden mold.
Having money in your account after you close is one of the best situations for any home buyer. Besides the home repairs that will come, what about the small items that will be needed for your new home the moment you move in.
Using your own funds and not your credit cards will keep you from increasing your debt loan. You have a new house payment, normally at or higher than your previous rent, try not to add to your monthly debt with additional credit card purchases if you don’t have to.
Read about my ZERO PROGRAM at http://www.bobrutledge.com/zero-down-payment-closing-costs and how easy it is for new home buyers keep their savings in their pockets.
How to avoid this mistake: Save enough money to make a down payment, pay for closing costs and moving expenses, and take care of unexpected expenses. This is easier said than done. But you can buy a home with a down payment of much less than 20%, allowing you to conserve your savings.
(5) Ignoring a home’s flaws and drawbacks
A lot of first-time home buyers fall in love with one of the first properties they look at. They ignore the negatives of the house and its neighborhood.
But you can’t disregard the downsides forever. For example, you might think you’ll be OK with a long commute, but after a few months of spending too many hours stuck in traffic, you’ll wish you had bought a house closer to work.
How to avoid this mistake: Do two things. First, resolve to visit many of houses before making an offer, you’ll be less likely to fall in love with the first or second or third home you look at.
Second, write a list of the attractive and the unattractive qualities of each house, and pay attention to each home’s downsides.
(6) Being indecisive
The flip side of choosing a place too quickly is acting too slowly when you find the right home. In a market with more buyers than sellers, you have to move fast.
I see this a lot when I first pre-approve a home buyer, they needed some time to think about it and made an offer two or three days after viewing a house, only to discover that another buyer had swooped in and made a successful offer. This will only happen to you after the first couple times, but by then you will know what you want in a home. If this happens to you know that it is normal and simply a part of the learning process of being a first time home buyer…..all things happen for a reason.
How to avoid this mistake: Once you look at multiple houses, and you get a feel of the market and you know what the market is like and where the prices are at, and you see something you like, don’t hesitate to make an offer, because you and 10 other people will be interested in that same property, this is today’s housing market.
(7) Overpaying for a house
First-time home buyers tend to pay more than experienced buyers would pay for the same house, according to research conducted by two economists with the Federal Housing Finance Agency. In their analysis of appraisal data from more than 1.7 million home sales, FHFA economists Jessica Shui and Shriya Murthy concluded that first-timers overpay by an average of 0.79%, which was nearly $2,200 per house, according to the data set they examined.
Shui and Murthy pointed to the inexperience of first-time home buyers. Real estate agents say newbie buyers let their emotions take over, too. First Time Home Buyers tend to overlook potential negatives and only look at the positives of a particular house. I tell me home buyers to act with their heads and not with their heart, but I know I am asking for the impossible so just use as much of one as the other.
How to avoid this mistake: Ask your agent for a competitive market analysis, a report that looks at the prices of comparable nearby homes that have been sold recently. And it helps to fully understand the real estate process, so seek out as much information as possible. If you have friend that recently went through the process or are currently seek out their advice.
(8) Skipping the home inspection
In some markets, a lot of buyers compete for a small number of properties for sale. In these strong seller’s markets, buyers are tempted to waive a home inspection. It gives them a competitive edge over smarter buyers who wouldn’t dream of forgoing an inspection before plunking down hundreds of thousands of dollars for a home.
It’s a HUGE mistake to buy a previously owned home without an inspection because there could be expensive, hidden damage that you wouldn’t spot but an inspector would.
How to avoid this mistake: Simple: NEVER EVER ALLOW THIS TO HAPPEN. Hire a licensed home inspector. Your real estate agent will gladly make a recommendation, but it’s better to hire an inspector of your own choosing who doesn’t depend on your agent for referrals. Plus, require that a home inspection contingency is included in your sales contract, your BUYER AGENT who represent you will help you get this negotiated in the sale contract.
(9) Underestimating the costs of ownership
After you buy a home, the monthly bills keep stacking up. This can come as a surprise if you’re not ready.
Keep in mind it’s not just your mortgage payment, you’re going to have the utilities bills that you did not or may not have been paying when you rented.
Renters may have been paying these kinds of bills, too. But the new home could very possibly have higher costs simply because your new home is bigger. Your house may come with entirely new bills, such as homeowner association fees.
How to avoid this mistake: Work with a real estate agent who can tell you how much the neighborhood’s property taxes and insurance typically cost. Ask to see the seller’s utility bills for the last 12 months the home was occupied so you have an idea how much they will cost after you move in. Ask for a seller disclosure for every house you are interested in, many times this will help you.
(10) Miscalculating repair and renovation costs
First-time home buyers are frequently surprised by high repair and renovation costs. Buyers can make two mistakes: First, they get a repair estimate from just one contractor, and the estimate is unrealistically low. Second, their perspective is distorted by reality TV shows that make renovations look faster, cheaper and easier than they are in the real world.
How to avoid this mistake: Assume that all repair estimates are low.
Seek more than one estimate for expensive repairs, such as roof replacements. A good real estate agent should be able to give you referrals to contractors who can give you estimates. But also seek independent referrals from friends, family and co-workers so you can compare those estimates against ones you receive from contractors your agent refers.
Consider purchasing a home in need of repairs with a renovation mortgage program that will allow you to use your mortgage to purchase your home as well as fund the repair/renovation costs all in one new home loan. Want to learn more about renovation mortgages visit my website to Learn More About Renovation Mortgages at http://www.bobrutledge.com/HomeStyle-Renovation-Mortgage
2018 Guide to Qualifying for a Mortgage with IBR Student Loans
When you have student loans, qualifying for a mortgage can get tricky.
Student loan guidelines have changed yet again. This is your ultimate guide to understanding how these changes will affect you in 2018.
Understanding IBR
When you begin to make payments on your student loans, you may have several options.
You may be making payments on your student loan based on your income. This is called an Income Based Repayment (IBR) plan.
IBR plans typically will not cover the principal and interest due, and the loan balance may increase even though you are making payments.
If your payment is based on a calculation that pays off your loan in full at the end of a loan term, this is an amortized payment.
All underwriting guidelines with all lenders will allow you to use an amortized payment when calculating your debt to income ratio.
IBR plans could also leave you with a $0.00 payment, even though your loan is in repayment status. Your income is reviewed every year to determine your new payment over the next year.
Student Loan Payment Change History
More and more students are straddled with student loan debt for years after leaving school.
Being chained to student loan debt requires an experienced locksmith to unlock the correct guidelines to get you approved for a home loan.
It’s almost a full time job keeping up with the updates to the underwriting guidelines, and IBR payments seem to send many loan officers into a tail spin of misinformation.
Student Loan Guideline Changes Since 2015
2 times for Fannie Mae Conventional Loans
2 times for Freddie Mac Conventional Loans
1 time for FHA Insured Loans
2 times for VA Guaranteed Loans
1 time for USDA Guaranteed Loans
The first major change to the underwriting guidelines happened when lenders were no longer allowed to ignore deferred payments or loans in forbearance.
The second major change was that you had to apply a payment to any student loan balance. If the payment reporting on your credit report will not pay off the loan at the end of a fixed term, your payments are not amortized.
Non-amortized payments became public enemy #1 by Fannie Mae, FHA, and USDA. In 2015, Freddie Mac guidelines did not allow for deferred payments or loans in forbearance, and would allow IBR payments, even if the reported payment is $0.00.
Calculating Your Debt to Income Ratio (DTI)
The entire student loan debacle is being caused by confusion around how your debt to income ratios are calculated.
Your debt to income ratio is calculated as your proposed housing payment (when buying a home) plus your monthly liabilities from your credit report, as a percentage of your gross income.
When using a Fannie Mae or Freddie Mac Conventional loan, the total housing payment plus monthly liabilities cannot exceed 50% of your gross income, or a 50% DTI.
Borrowers using a FHA mortgage have 2 DTI ratios. A front-end debt to income ratio is your housing payment as a percentage of your income. A back-end debt to income ratio includes your monthly liabilities from your credit report.
FHA will allow your housing payment to be as high as 46.99% front-end DTI, and a maximum 56.99% back-end DTI including your debts.
Student loans become confusing when no payment is reported on your credit report, or when your payment is an Income Based Repayment (IBR) payment.
2018 Student Loan Guidelines Snapshot
Fannie Mae Conventional
Non-amortized Payment – IBR Ok, even with $0.00 payment – Updated April, 2017
Amortized Payment – Ok with all lenders
Deferred or forbearance use 1% of loan balance.
Freddie Mac Conventional
Non-amortized Payment – Must use .5% of loan balance – Updated February, 2018
FHA Government Insured
Non-amortized Payment – Not Allowed | Must use 1% of loan balance
VA Guaranteed Loan
Non-amortized Payment – Not Allowed | Must use 5% of loan balance divided by 12
USDA Guaranteed Loan
Non-amortized Payment -Not Allowed | Must use 1% of loan balance
Freddie and Fannie Swap Guidelines
Interestingly enough, Fannie Mae and Freddie Mac have since swapped positions on IBR payments as of the most recent update by Freddie Mac in February 2018.
Freddie Mac no longer allows for IBR payments, while Fannie Mae does since April 2017. Fannie Mae will even allow an IBR payment with a $0.00 payment.
If you have an IBR payment that is equal to less than .5% of the balance of your student loan, Fannie Mae is your option for being able to use the payment as reported on your credit report.
Creative Solutions to Solve Student Loan Problems
If you are trying to buy a home, and the pieces just aren’t fitting together, here are some creative solutions that past clients have successfully done.
Payments Deferred or Loan in Forbearance
If you have loans with deferred payments, or if your loan is in forbearance, we have had homebuyers go into an income based repayment plan, and qualify using a Fannie Mae Conventional
Parents Co-Sign and Pay Student Loan Payment
Fannie Mae recently updated their “Contingent liability” guideline to allow student loan payments to be ignored, if you can show that a co-signer has made the payments for the past 12 months.
Debt to Income Ratio too High for Conventional
This home buyer is consolidating over a dozen loans into a 30 year amortized payment. We needed an amortized payment to take advantage of more flexible DTI requirements over Conventional.
Payment Not Showing Up on Credit Report
If you loan is in repayment, your lender can get a credit supplement (if needed) from the credit bureau by providing them with a copy of your statement from your student loan lender.
Have Less than 5% Down Payment and IBR Payment
It is a common misunderstanding that FHA offers the lowest down payment. VA & USDA offer 100% financing, but additional qualifying is required.
Both Fannie Mae and Freddie Mac have programs that allow for as little as a 3% down payment. Eligibility can be determined by income limits, or the area you are buying in.
There are no income limits for homes being purchased in “targeted” low to moderate income. These special programs also include discounted mortgage insurance and discounted closing costs.
Why Lenders Get it Wrong
If you’re calling from a TV, radio, or internet advertisement, you are most likely being connected to a call center, where the “Loan Officer” has little to no actual mortgage experience. You can look up the experience of your Loan Officer at http://nmlsconsumeraccess.org/ and see when they got their mortgage license and what they were doing before they became a mortgage loan officer. (YOU WILL BE SURPRISED!)
I call these “big box” lenders. These lenders are amazing at processing a certain type of loan file that does not require anything too far outside the box. They only want and really can only do the vanilla stuff.
If you are working through a big box lender, here is what is really happening, your application is not getting in front of a professional until it reaches the underwriter.
Many times, your file is not in front of the underwriter until after you’ve already accepted your purchase offer and paid for the appraisal.
Hopefully, there’s enough time, and the underwriter is experienced enough to look up the guidelines, and can figure out how to save your new home by getting you approved for the right loan.
I wouldn’t believe this happens as much as it does if I didn’t see it professional so often! So many of these horror stories we hear could have been avoided if a professional loan officer was used, and not a call center lender.
Work with an Expert
Pros and Cons of a Low Down Payment
When it comes to a down payment on your home, are you aiming high or low? The down payment is the number one reason most buyers wait longer than they’d like to buy a home. In fact, many sidelined buyers have the income and qualifications to make the monthly mortgage payment, but lack the down payment.
But, there’s also a misperception about 20 percent down. In a NerdWallet study, 44 percent of Americans believe you need 20 percent or more to buy a home. The reality is that about 60 percent of homebuyers financed their purchase with a 6% or less down payment, according to the National Association of REALTORS®.
But, how low is too low for your down payment?
The fact is there are no cookie cutter mortgages — your home financing will be as unique as you. FHA is known for their low down payments for first-time homebuyers, but many conventional fixed rate loans offer lower than FHA’s 3.5% down.
What about zero down? VA loans for armed service members and qualified veterans provide a great value, including no down payment, relaxed credit requirements and no mortgage insurance. (Plus, down payment programs may help with closing costs and even an equity boost.)
In certain areas there is the USDA Mortgage that also provides a zero down payment option, low interest rates, relaxed credit guidelines, but with income restrictions depending on where and number of people to live in the new home.
Some lenders offer grants to buyers to overcome the down payment hurdle. But, according to guidelines from Fannie Mae and Freddie Mac, lenders can make contributions to a borrower’s down payment or closing costs only after the borrower has contributed a minimum 3% down payment.
“To meet that 3% threshold, the borrower can still come with funds from a relative, a government agency — such as grants from a housing finance agency — or from an employer housing program. That has not changed,” says Lisa Tibbitts, a spokeswoman for Freddie Mac.
Let’s take a look at the pros and cons of a smaller down payment.
The Pros:
You can buy a home sooner. With a lower down payment, you’re putting less down and not saving as long before you get in a home. It can help you secure a loan at today’s low rates and avoid any rent increases that may be on the horizon.
You’ll have more reserve funds on hand. When you buy a home, there are many other related costs, including home repairs and improvements. With a smaller down payment, you’ll avoid being “house poor” as soon as you leave the closing table and can enjoy using some of your hard earned dollars to make the home your own.
Down payment programs can help. Don’t overlook down payment programs as part of your home financing. These programs can help boost your down payment savings or even provide a tax credit for the life of the loan. Some programs provide affordable first mortgages with a very low down payment.
The Cons:
Your monthly payment will be larger. When you put less down, your home loan — and monthly payment — will be larger. Work with your lender to ensure you are comfortable with the monthly payment.
You may be required to pay mortgage insurance premiums. Some down payment programs may waive mortgage insurance (MI), but in most cases if your down payment is below 20 percent, you’ll be required to get MI — it helps manage risk for your lender and protect them if you fail to repay the mortgage. It’s important to note that with a conventional, fixed rate loan and borrower paid MI, you can cancel your mortgage insurance when you reach 20% equity in your home. With an FHA loan, you must continue to pay MI for the life of the loan.
Could hurt in a competitive market. Unfortunately, some sellers see smaller down payments as a negative, although it’s not necessarily true. In fact, the seller may actually earn less on the home from an all cash buyer with a lower offer. Plus, some down payment programs will fund your closing costs — something you won’t have to negotiate with the seller. Put the seller at ease by getting your financing set up early and documenting it in a letter accompanying your offer.
The bottom line? The right down payment for you depends on your situation. Weigh the overall pros and cons of a low down payment and talk with your lender, Bob Rutledge, about what is the best fit for you. Visit www.bobrutledge.com to learn about low down payment options, VA and USDA zero down payment programs, and down payment assistance.
With significant changes to the tax code taking effect this year, homeowners and prospective buyers are revising their plans to take advantage of its sweeping changes. Here’s an analysis based on information from the National Association of Realtors and NerdWalllet.
Tax Rate Reductions. Joint filers with incomes of $77,400 to $400,000, which will include most first-time buyers, will see their tax rates decline from two to four percent when they file their 2018 taxes next year.
Mortgage Interest Rate. Changes in the mortgage interest rate—lowering the cap to mortgages worth o $750,000 from 1 million and excluding interest paid on home equity loans— would affect only the wealthiest first-time buyers directly. The changes will make second homes and equity loans more expensive for first-time buyers in the future.
State and Local Taxes. The new law limits the amount of property taxes and other state and local taxes to $10,000 a year. First-time owners, as well as current owners, will lose the ability to deduct thousands of dollars that they can deduct in 2018, increasing the cost of homeownership, especially in high tax states like New York and California. In the State of Missouri most First Time Home Buyers homes will not have an annual property tax anyway near $10,000.
Student Loan Interest Deduction. Potential first-time buyers and their parents who have been burdened with student loan debt will lose the ability to deduct the interest they pay on their loans. As a result, it will cost them more to pay off their debts to reach a DTI that would qualify them for a mortgage.
Personal Exemptions. Personal exemptions for filers and their dependents, worth $4,150 each in 2017, was eliminated in the new tax law.
Moving Expenses. Taxpayers have been able to deduct some moving expenses related to their employment, but this deduction is eliminated in the new act.
Standard Deduction. Taxpayers must decide whether to take the standard deduction or itemize their deductions. In the past, most homeowners have itemized to take advantage of the mortgage interest deduction and the deduction for state taxes, including property taxes. The new law doubles the size of the standard deduction from $6,000 to $12,000, or $24,000 on a joint return. According to Zillow’s Alexander Casey, under the current setup, roughly 44 percent of U.S. homes are worth enough for it to make sense for a homeowner to itemize their deductions and take advantage of the mortgage interest deduction. Under the new law, that proportion of homes drops to 14.4 percent.
Impact on First-time Buyers: NAR’s research department modeled examples of homeowners as different income levels, mortgage sizes, and family sizes.
A single first-time buyer who purchases a home costing $205,000 and takes out a 30-year fixed rate mortgage at 4% interest. She puts down 3.5 percent. Assuming she buys early in 2018, her first-year mortgage interest would total $7,856, and she would pay real property taxes of $2,050. Under the old law, her taxes for 2018 would fall by $2,098; Under the new law, her taxes would rise by $30. Moreover, the difference between renting and owning was $2,098 under the prior law but shrinks to $637 ($6,060 - $5,423), or $53 per month.
A family of five with an income of $120,000 that buys a $425,000 home with a 10 percent down payment on a 30-year fixed mortgage at a 4 percent. Under the old law, they would save $3,219 by buying. Under the new law their taxes would decline only $100, but if they had remained renters, they would receive a tax cut of almost $2,400. Under the prior law, the tax benefit of buying a home was $3,219. Under the new law, they will get a tax cut $948 ($8,999 - $8,051), a much weaker incentive to buy.