Audio Version: Let Me Hear It!
Just like that, 2017 is two months old and we are due for another phone-a-friend. This month, we asked Barry Zanck, President at Americap Direct Funding, to hold off on the king cake just long enough to answer some common questions about buying a home. Fortunately for us, he agreed.
Here’s what Barry had to say:
Q: What is trending in lending?
A: Following the financial crisis in 2007-2008, government intervention by way of the Dodd-Frank Act made it harder for even qualified borrowers to get approved for a loan. President Trump has moved toward rolling these regulations back, making it easier for borrowers to obtain a mortgage (and with less stringent documentation requirements). If loans become easier to acquire, prices could potentially continue to increase, especially in areas lacking supply like Southern California.
Q: How much can I afford?
A: In general, all debt payments – including credit cards, student loans, car loans and housing-related obligations – should not exceed 43% of gross income. For example, if you have no other debts and your monthly gross income is $8,000, principal, interest, property tax and insurance (PITI) plus HOA, should not exceed $3,440/mo. But, what your lender thinks you can afford and what you really want to spend may be different. Read the Sense’s “A Balancing Act” for more on home affordability.
Q: How important is interest rate?
A: Interest is potentially a 30-year expense, so, it’s important. The total cost of borrowing over such a long period of time adds up, making even a small move in rates significant. Know that for every 1% increase in interest rates, home prices would have to drop by around 10% for the total cost to stay the same. If you’re thinking about buying and expect interest rates will go up, waiting for prices to fall may end up being costly, after all.
Q: How much should I put down?
A: Down payment requirements will vary from 3%-20%, but the average payment is around 10%. A mortgage is one of the cheapest forms of borrowing and interest is income tax deductible. This makes it compelling to borrow more and invest the difference. However, keep in mind that Private Mortgage Insurance (PMI) is required if less than 20% is put down. PMI can cost around 1% of the loan amount and may be structured with an upfront cost plus on-going monthly payments, just monthly payments or in the form of a higher interest rate (known as Lender Paid Mortgage Insurance, around .375%). Depending on the loan amount, type and down payment, mortgage insurance may be required for the life of the loan, for a certain number of years or until you have built a minimum amount of equity1.
Q: How do most borrowers finance?
A: The most common financing option is a 30-year, fixed rate mortgage. Other terms may be considered with the help of a financial advisor. Nearly all mortgages are either sold by the lender to the government agencies Fannie Mae or Freddie Mac, or they are insured by the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA). There are borrowing limits for such loans. In most of the country, the maximum loan limit on Fannie Mae, Freddie Mac and VA loans is $424,100 (in 2017) and most FHA loans will be limited to just over $275,000. These limits are higher in certain areas.
Q: How much does credit count?
A: The lower the down payment, the larger the role of credit. Borrowers should know that there are eight different credit scoring models and a lender may not use the same model that was used when you pulled your credit score online. The score your mortgage broker says you have may be 20% higher or lower than what you think. In most cases, you have to have at least a 620 credit score to qualify for a mortgage.
Q: I am retired but want to move. Can I qualify for a mortgage?
A: Lenders will consider income available from all sources, inducing Social Security, dividend and interest income and mandatory retirement distributions to determine how much they will lend. However, it’s not enough that the portfolio generates income; lenders want to see at least a few months of regular withdrawals from available funds. The portfolio has to be large enough to sustain such pulls for at least three years in order to qualify.
Footnote:
1. PMI might be income tax deductible for joint borrowers with an Adjusted Gross Income of less than $109k in 2017 ($54k single filers). PMI insurance on Freddie and Fannie loans will end after a qualified appraisal shows more than 22% equity. FHA loans require PMI insurance for 11 years if at least 10% is put down, otherwise it will be payable for the life of the loan. VA loans do not require a monthly mortgage insurance premium.
