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CAN I GET A HOME LOAN
There is a lot involved in the process of getting a home loan. Many people may wonder what their options are, or if there is a home loan out there that they can qualify for. In this, our second blog in our “Ask the Lenders” blog series, we will go more in-depth into the lending process and look at some of the requirements and options available to those seeking a home loan. We will be talking to Kylie Queen and Colby Steel from Summerlin Financial.
Q: What factors are important in getting approved for a home loan?
Kylie: When a borrower first talks to a lender they need to know specifically how much they make. It is surprising that most people don't actually know how much they make annually, or even per hour. They'll tell me, "I work on average 40 hours a week." But then we get there pay stubs and that's not accurate. They work 25 hours one pay period and then 40 hours the next and then 30. Well, that doesn't work when we calculate them at 40 hours a week consistently for the year and then we get their documentation and it doesn't add up. And then they don't qualify for the loan that we told them that they would be qualified for based on the information. Also, people who make overtime or bonuses, it is very important for them to understand that we need a two-year track record of that in order to be able to use that overtime.
Colby: Things that I look at when pre-qualifying borrowers - one of the first things is going to be credit. I'll typically ask before we even pull credit. "What was your credit score the last time you checked it." That would give me some kind of a range. Have you had any major derogatory credit events in the last seven years? Bankruptcy, short sales, foreclosures, all that will definitely factor in on what we can do and what loan product we need to go with. I'm going to evaluate the down payment and liquidity of that down payment. So, depending on your credit score your debt to income ratio and your down, that'll help me recommend the best loan product for you. How much debt you have in relation to how much income you make is extremely important. If those ratios are a little bit too high, we might need to pay stuff off, we might need to wait. There are several different factors that go into that. Once I have all that information, at that point I can pull credit, run the numbers, and do my due diligence - then we can have a conversation on if we need to move forward, if we need to wait, what we need to do to move forward, or if there are any remedies that can happen.
Q: What should people know about working commission and how that affects work history requirements when getting approved for a home loan?
Kylie: If you had a job driving a U.P.S. truck for a year and a half and then you left that job and you now sell chips for Frito Lay and you get paid an hourly rate at Frito-Lay but you also get paid a commission on how many chips you sell them. You've only had that job for six months. You add the two jobs together, You have enough job history to get approved. However, we're not going to be able to take that commission income that you receive from Frito Lay for the last 6 months and use it as a qualifying income. One thing I do tell people in that situation is take all your commission and, you know, you're making good money paid down as much debt as you can, because that will reduce your monthly debt to income, which will help you qualify for more. But we're still not going to be able to take that income and put it into the qualifying. So the base pay is all we can use for qualification purposes. With commission-only you have to have to two years. There's no way around that for commission. If you are a base salary plus commission or overtime, we just can't use that commission. That's right. If you're paid like a 1099 employee. We need two full years working consistently as a 1099. And we can have little gaps as long as those gaps are explainable. Ok, I moved from Wyoming to Arizona and then I couldn't find a job for the first three months and then as soon as I got a job I start working again. You can piece that together. Anything over a few months is going to be an issue and questionable. If we have a really good explanation for it, like if your mother was diagnosed with cancer and you had to quit work to stay home and help. Honesty is the key. A lot of times buyers don't want to say too much, but if they'll give us the whole story, we can kind of piece it together and help them present it to the underwriter in a way that the underwriter will accept. But if they don't tell us the truth we can't help them.
Q: Can time in college be counted as work history if they get a job in the field of their degree?
Kylie: That is absolutely true. We need to see the transcripts that show that they were in school and, as long as they're using what they went to school for, we can use it in place of work history. If they went to school to be an electrical technician and they are now working as a truck driver, that would not work. If they are using that degree we can show those transcripts to the underwriter, prove to them why they don't have the full work history - they were in college and got their degree and now they're putting it to use in this job. This applies to full-time jobs, 1099, self-employed etc. Like if someone went to school to become a teacher and then they get a contract as a 1099 working for a school, as long as we can get an offer letter or a contract or something showing that their employment will continue, and prove that they went to school for that with their transcripts, we should be able to work with that. They can have just left college - they didn't have a job, then they're going to become a teacher and they've got a contract with the school district - that would work because, under the new repayment laws, we have to prove that their income is going to go on for at least the next three years. So, if they have a contract in place with a local school, that in itself is enough. We don't need them to have shown they were already a teacher for 2 years. We approved them based on the income they're going to be making on that contract and that contract is going to go on for us to be able to approve them. It doesn't have to be a three-year contract, an open-ended contract for employment that is expected to continue for at least three years will work.
Q: If a buyer is having trouble saving up enough for a down payment, what are their options?
Colby: The common misconception when purchasing a home is that you have to have 20% down. I can tell you that's absolutely not the case. There are several different low down payment options available, depending on the credit, the occupancy, and the debt to income ratio. There's a bunch of different options that are available all the way down to 3% down. In some areas, rural development areas, like Kingman and certain parts of Fort Mojave and Parker, there's a loan called USDA available, which is actually zero down loan program. The other common misconception is that you have to have the money liquid, ready to go in a checking or savings account to be able to utilize that down payment. That is untrue as well. You can get the down payment, all or part, as a gift from a family member, a spouse, blood relative, or something like that. You can also utilize investment accounts such as stocks, bonds, annuities, mutual funds, face values of life insurance policies... You can also utilize retirement accounts such as 401Ks, 403B's...things like that. There are tax ramifications whenever you pull money from a retirement account before age 59 and a half. So you definitely want to talk with your tax adviser or the plan administrator for your retirement plan before doing so. You can also do a 401k loan, which some people offer. A 401K loan has several benefits. Number one, you pay the money back to yourself, usually via a payroll deduction, and you are also paying interest to yourself, meaning that not only are you paying interest to yourself, which is awesome, but we also don't have to factor in that monthly payment for a 401k loan into your debt to income ratio. So, it's just all around a good thing. Also, depending on what retirement plan you go through, some of them have programs to where if you're a first-time homebuyer you can pull up to let's say ten thousand dollars without incurring a penalty. You can pay tax if it's a traditional IRA or 401k no matter what, but you, in some cases, can avoid the penalty. That is plan specific. I am in no way shape or form able to give investment advice - that would be something to talk about with your accountant, or financial adviser.
Kylie: Conventional used to be the main type of loan with 20 percent down - and that's not really the go to anymore. In our area, not really Havasu, but in Fort Mohave and Kingman, the USDA loan program is a very highly utilized program that allows for 100 percent financing for qualified buyers - meaning they can't make over a certain amount and USDA just increase that to 82K for the household and they also don't allow the ratios to go as high. Like with a conventional loan, a borrower's debt to income ratio can go up to 50 percent. Which means that all of their income versus all of their debt - they can't go over 50 percent. On a USDA loan, they only allow you to go up to 41 percent on the back end, which means all of the debt combined. The front end, which means just the cost of the home, cannot go over twenty-nine percent. So there are more specifications we have to make sure the borrower fits in in order to qualify them for you. USDA loan versus a conventional loan. USDA requires a minimum of 620 FICO score, same as conventional. But again, they have 100 percent financing, no money down, the closing costs can be paid by the seller, or gifted, or paid by the borrower. For USDA you know down and the seller can pay the closing costs or they can be gifted. I did not find a max percentage for USDA. On FHA, the down of three and a half percent can be gifted and seller closing costs can be gifted, but no more than 3 percent. So that's actually in the guidelines specification. So that's a really really great program. There's also the V.A. loan program, which is probably the best loan program out there. The VA loan can finance 100 percent. There is also no mortgage insurance on a VA loan. There is an upfront fee if you are not a first time user of the program, or if you are disabled it's the fee gets waved. Unlike a conventional loan, if you put 20 percent down. You won't have mortgage insurance but anything less than 20 percent you'll pay mortgage insurance. For a USDA loan, they have the monthly guarantee fee. On the FHA loan, you have mortgage insurance for the life of the loan unless you put down 10 % or more. If you put 10% or more down, you still have to pay the mortgage insurance for 11 years. Most people using an FHA loan do not have that down. They have the minimum 3.5%, whereas on a conventional loan, after it's paid to 80%, the mortgage insurance will drop off. On a USDA loan, it's basically for the course of the loan but it's a much smaller percentage. A VA loan is the only loan that doesn't have a monthly fee like that. So most of the first time homebuyers will fit better into the FHA category. Not because they have the means to put a down payment, but because they already had debts. And when you add in the cost of the home they have higher than 41%. FHA allows you to go up to 55 percent. So FHA is the highest debt income ratio loan program, which is why more borrowers fall into that category rather than the USDA loan program. FHA will allow them to go higher so they don't have to pay off the debt, but then they need the 3.5% down. So, they either save it up, they have a family member gift it to them or we do have a grant program that allows for a payment of 2% of the 3%. So the buyer only has to come in with 1.5%. But the only caveat with that is the rate is usually about a point higher than it would be under normal circumstances. If the customer has enough to do a 20% down conventional loan and this home is going to be their forever home, I would recommend that they do that. The reason is that overall they will save money not having that mortgage insurance on their monthly payments and they're going to be able to pay down the interest quicker. If the customer has $15k to work with and the 3.5% is about $6k of that and we're kind of tight on the ratio, I'll tell them to put the extra money towards debt or closing costs, things like that instead. Because putting an extra three or five thousand dollars down is really not going to change your payment that much in the grand scheme of things. Now another caveat to the USDA loan program is that those who use that program unless you can qualify for another program that's what that program is set to do is to get home buyers who would otherwise not be able to purchase the home into a home. So if they have, say $10k seeing how the underwriter may look at that say “why are they going USDA? They have enough to do 3.5% down and pay closing costs.” So, in that case, especially if the ratios are tight, I'll tell them to go pay their credit cards off with that money and get rid of some of the debt, so that the underwriter will say “Ok, these people fit into this category.”
Q: Are loan down payment options beneficial?
Colby: Yes and no. So yes, insofar as the money out of pocket is definitely far less than having to put, let's say, a 20 percent or whatever it is down on the loan. The caveat to that is, whenever you do put less than 20 percent down on a loan, you are obligated to carry mortgage insurance on the on the property. Now, depending on the loan, some loans like FHA and USDA, that mortgage insurance, for the most part not always, but is almost always on there for the life of the loan - meaning that you either have to refinance out of it, sell property, or something like that. With conventional loans, When you put less than 20 percent down you do have to carry mortgage insurance on the property. But it's not always forever. So you can either pay it down until you have 20% equity in the property, in which case at that point you can request for the mortgage insurance to be removed. Once you hit 22% equity in the property the mortgage insurance automatically falls off. So it's not always on there forever. With mortgage insurance, it's done through a mortgage insurance company and it's designed to protect the lender in case of default. Everything in the lending world is risk-based. So, whenever a borrower has "less" skin in the game, the less skin in the game they have, meaning lower down payment, the more the mortgage insurance is going to be. With government loans, USDA loans, FHA loans, stuff like that, the mortgage insurance is usually a flat percentage. With conventional loans, it is 100% credit score driven, as are interest rates. So, if you have a 650 credit score versus an 800 credit score the interest rates and the mortgage insurance are going to be substantially different. Once we get into a lower credit score scenario we're usually going to start looking a lot more into government loans than we would into conventional loans.
Q: What are things you should not do while in the process of getting a home loan?
Kylie: We do not want them to go buy anything or opened any lines of credit while we are working on this because especially with USDA because the ratios are so tight. Don't buy anything during the home buying process. If you're looking to buy a house, buy the house before you buy a car. One thing I would tell them with the new regulations we are not allowed to ask for the upfront documentation until we are under contract. So, when we ask for something, we need it. Be as honest as you can and as quick as you can because we have a certain time frame we have to follow. When we get the contract, we're supposed to have disclosures out within three days. We can't get disclosures out if we don't have the documentation we need to submit to the lender to get the disclosures out.
Colby: First and foremost, do not obtain any new credit. The lender is going to investigate all recent inquiries within the last 120 days, or something like that. They're going to see if you've obtained new credit, if so, what the balance is and how much your monthly payment is. The other thing is, do not under any circumstances deposit cash in your bank account as it is not able to be used. After September 11, the government has implemented not just in the home mortgage process, but also in retail banks and consumer banking, they've implemented what they call AML laws which are anti-money laundering laws. These are laws that basically make it to where in mortgage transactions specifically every single penny has to be accounted for sourced and paper trailed in the form of bank statements and transaction histories from your bank. This is to deter money laundering, terrorism financing, etc... If, let's pretend, you deposit $10,000 cash into your bank, I am going to see that once I ask for the last two months bank statements and we will then ask you what the money is from and, although you will explain it, we'll still not be able to use it. We will then have to back that $10,000 out from the available assets that you have and it could potentially disqualify you from getting a loan. Also, you know, a lot of people during the home buying process want to be able to qualify for more, they want to be able to get their credit up, which is all fine and good. So, they pay stuff off which is completely fine. In that case, we still need to source and paper trail where the funds came from to be able to pay off whatever debt. The biggest mistake that people make is whenever they pay stuff off, let's pretend they pay off their credit card that they've had for 15 years, they will then turn around and close the account. Closing a credit account is one of the most detrimental things that you can do, period, but especially during the home buying process. Obtaining new credit is another one. You know some people get really excited and they want to go buy 2000 dollars worth of furniture, or a new washer and dryer, or something like that on their credit card. It then spikes their payment, which spikes their monthly payment, in turn raising their debt to income ratio and could potentially disqualify the buyer.
Q: What factors, if any, will automatically disqualify a person from getting a home loan?
Kylie: Bankruptcies and foreclosures. For instance, if a borrower (with a bankruptcy or foreclosure) wants to buy a second home or vacation home, their only loan option is a conventional loan. If they had a bankruptcy or a foreclosure say five years ago. Well, the time frame on that is seven years. You can't get a conventional for 7 years after that. Now, on FHA you can get an FHA loan within two years after the bankruptcy. After a bankruptcy or foreclosure, you will have to wait at least two years before you can get a mortgage unless you can afford to do something like a non-traditional or Hard Money Loan, which would be a substantial amount down. The other is if you are delinquent on any federal debts, such as back taxes or student loans, you will not qualify for a government loan. Now, if you bring the student loans parents up to date, and/or show that you have set up a payment plan with the government for your back, taxes and you've made at least three payments on that, then you can apply for a government loan.
Another thing is lates. If they know that they've been more than 30 days late on a bunch of their accounts, they're going to have to wait because you're only allowed one 30-day late within a 12 month period. Another thing is collection accounts. We don't look at medical debt. Medical debt is out of the picture. If somebody has fifty thousand dollars in medical debt on their credit, we don't look at that. Will that customer probably have a high enough FICO to find qualify? Probably not. Also, regular collection accounts, anything with a combination of two thousand or more is going to have to be taken care of. Anything over $2000 is going to have to be paid down and brought under that $2000 mark. Otherwise, the underwriter will call it. If a customer knows they have collection accounts and they want to try to get a home loan and they're working on paying them down, they're not going to qualify until that debt is paid down.
Q: Is there any information about home loans that has come out in the last year/two years that would be important for people to know?
Colby: Additional information you should know, on October 3rd, 2015, new CFPB, which is the Consumer Financial Protection Bureau, came out with the way that we disclose our rates and fees. We used to happen in the credit crisis is somebody would get disclosed certain fees upfront, and then, right before closing day, the lender, or the broker, or whoever, would throw in additional junk fees, discount points, things like that, that would spike their closing costs substantially. The poor borrowers would be sitting at the closing table and are waiting to get their keys and have moving trucks ready to go. So, they would just bite the bullet and pay the fees and it was - in my world that's known as predatory lending. October 3rd, 2015, enacted what they called TRID, which is a new way that we disclose things. So now, the fees, closing costs, - all the costs associated with the loan get disclosed several times, but twice mainly as staples during the home buying process. First of which being a loan estimate - So, within three business days - including Saturday - of doing a loan application, that lenders are required to disclose a loan estimate to you. This is an estimate, exactly what it sounds like, a loan estimate that basically goes over the floating interest rate, which means the interest rate at the time that the lender quoted it, as far as prepaid taxes and insurance, what those are approximately going to be, any lender processing, underwriting, origination fees, and title and escrow fees. All that stuff gets disclosed upfront. Fast forward towards the end of the loan process - there is a three day waiting period before the buyer can sign their loan documents to where a closing disclosure or CD has to be disclosed. The CD is laid out almost identical to the loan estimate, except it's called a Closing Disclosure versus an L.E. loan estimate at the beginning. The CDis laid out almost exactly the same, but these are more buttoned-up numbers and more accurate, and there will be a final one that has all the proper rates, fees, closing costs, everything will actually go on your final loan documents. Point of all this being, you can, at the end of the loan estimate, next to the closing disclosure, you can see, crystal clear, what has changed - if a fee was higher, or lower, or whatever it is, and it gives you the opportunity to be able to compare those costs as a consumer.
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Kylie has worked in the escrow/title field for 15 years and switched to lending about a year ago. She is the branch manager at Summerlin Financial in Kingman, AZ.
Colby Steel is a Mortgage Loan Officer at the Lake Havasu branch of Summerlin Financial and he specializes in VA loans.
BMP Network is a Real Estate Team under Keller Williams. They excel in meeting the real estate needs of buyers, sellers, and investors in the Kingman, Lake Havasu City, Mohave County, AZ, and Las Vegas, NV areas.