What is Private Mortgage Insurance or PMI? PMI is an insurance paid by you the borrower to protect the lender if you the borrower defaults on your loan. What causes you to have PMI? Easy answer, any time you put less than 20% down on a conventional loan you will need to carry some form of PMI. Most people have heard of the term PMI, and most people think it is bad and immediately want to avoid it. Many articles on the internet will recommend the same. I on the other hand have a little bit of a different of opinion. PMI on a loan is no longer a taboo, actually a huge majority of the consumer market today carries PMI on their loan. Now let's talk about the two most common types of PMI: Monthly MI or Borrower Paid - This is the most common option, it is simply added on to your monthly payment just like your taxes or home owners insurance would be to increase your overall monthly payment. (This can be removed, and we will talk about that later) Lender Paid MI or LPMI - This option has lost popularity over the last few years, in this option you are just taking the MI rate and adding it to your interest rate. Quick example your rate was going to be a 3% but the LPMI cost is 1%, now you have a 4% interest rate but you are not paying monthly MI as a separate part of your payment. (This cannot be removed, and we will talk about that later) In most cases I would recommend you the client taking the Monthly MI option. The why for this is you get more flexibility with removal in the future. Now for the Pros and Cons to having PMI: (Keep in mind this is all generally speaking) Pros: Lower Down Payment Lower Interest Rate Options Can be removed down the line May be tax deductible (ask your tax prep individual) Cons: Higher Monthly Payment Can restrict how much home you can have Depending on MI type selected could increase rate Depending on MI type selected may not be removed down the line So why do I think having mortgage insurance is not a bad idea? Let's dig in to a quick example. You are buying a home for $300,000 and have the option of putting 5% down, or putting 20% down. When we look at just straight cash we are talking taking $15,000 out of your pocket or $60,000 out of your pocket. A difference of $45,000!! Let's discuss how long it would take for you to recoup your investment. Let's say in this same example you are paying an extra $200 a month between your Principle and Interest payment plus your PMI payment doing 5% down instead of 20% down just to avoid MI. It would take you the borrower almost 19 years to recoup the $45,000 you had to spend out of your pocket. Anything that takes you almost 20 years to recoup is not a great deal. Having the extra $45,000 in your pocket allow you to make home improvements, invest, pay off debts and have a safety net if anything financially comes up in your life. I know what you are thinking, but the other way I would have equity!! I need equity!! I want you to do me a favor next time you go to the store and hit the check out line see if the cashier will take your equity as payment. I bet they are going to look at you like you are crazy. Also we cannot forget that equity is made up, the equity you have today could be gone tomorrow, but the cash in your pocket, or in the bank, or under your mattress doesn't go away unless you use it. PMI removal - so with all the factors I mentioned above we also have the ability to remove your PMI if you have taken a monthly MI option. How to remove PMI? Reach 80% LTV - Once you reach 80% LTV you can request PMI to be removed from your lender. Reach 78% LTV - Once you reach 78% LTV your lender must remove PMI from your loan. Refinance your loan - You can always refinance if you feel your home is worth more, and you want to change your rate. LPMI does not allow you to remove PMI because you bought it in to your rate, so your only option is to refinance your loan. Imagine if you spent an extra $45,000 when the current market within a few years would have allowed you to remove PMI naturally with inflation. You are going to wish you had some of that cash back. Final thoughts on PMI. I think if you have the option to put enough money down to remove PMI or keep it, just keep it. Save yourself the money in your pocket, be prepared for life experiences because they will sneak up on you when you least expect it. I will use my real life loan to paint the final picture. My wife and I bought our home 3 years ago and put 5% down, instead of the 20%. In the last 3 years are home value went from $340,000 to $395,000. I was able to remove PMI, get under 80%, and only paid a higher monthly payment for 3 years. I was still able to keep a big chunk of cash in our account that was used to make upgrades to the home. At the end of the day always do what is most comfortable to you and your family, every one has a different comfort point on their loan, and it is up to you and your mortgage professional to make that determination. Always always always speak with a mortgage professional to know your options.
When it comes to finding out which loan is right for you many factors need be taken into consideration and knowing your options is the best place to start. Today's post we are going to talk about the two most common loan programs - FHA and Conventional. Let's start with how much money do you want to put down on your home. A common myth out in the industry is that you need 20% down to get in to your dream home, while for some people this may be true this is not a hard fast rule by any means. Let's look at FHA first for example: FHA will allow you to get in to a home with as little as 3.5 % down with no additional restrictions - the nice thing about this is your down payment can come completely from a gift from a family member. (Assuming all Underwriting guidelines are met) Keep in mind no matter how much you put down on FHA you will be required to pay an Up Front Mortgage Insurance (UFMIP) and a life time mortgage insurance (MIP) Conventional will all you to get in your home with as little as 3% down. Putting 3% down on a Conventional loan is going to have some caveats that we need to discuss. Number 1 - Conventional offers two programs called Home Ready and Home Possible, these two loan programs require you to qualify by meeting an Area Median Income requirement. Think of this in simple terms if you make too much money you cannot qualify for these programs. Some of the big benefits to these two program are lower MI factors, lower rates, and lower down payment. The link below will all you to search and check your own AMI for your area. https://sf.freddiemac.com/working-with-us/affordable-lending/home-possible-eligibility-map https://ami-lookup-tool.fanniemae.com/amilookuptool/ Number 2 - If you do not meet the Home Ready and Home Possible qualifying options you need to fall under the category of a first time home buyer. A first time home buyer is defined as someone who has not had ownership interest in a property in the last 3 years. (Yes, being on title counts!) As long as at least one borrower on the loan is a first time home buyer you can do 3 % down. If you do not meet one of the two options above you will need to bring at least 5% down but just like FHA this entire down payment can be a gift from a family member(Assuming all Underwriting guidelines are met) Keep in mind if you are putting less than 20% down you will need to have private mortgage insurance on your loan. This will be paid either monthly as a borrower paid MI, or included in your rate as a lender paid MI. Next we need to discuss your debt to income ratio. (DTI) Your DTI is a huge determining factor on if you qualify for a loan or not, lets breakdown the two options again. FHA will allow your DTI to go pretty high in most cases. In my experience I have come across borrowers that have been approved on an FHA loan with a DTI as high as 55%. This gives you as a borrower much more flexibility when it comes to your monthly payment, and debt that may or may not need to be paid off for you to get in to your loan. Always remember just because you can go to 55% does not mean you will necessarily get approved at 55%. The rule of thumb on FHA in general is stay under 50% and you SHOULD be good. Conventional tends to be much more conservative when it comes to your allowable DTI. In my experience I have witnessed borrowers qualify with a DTI as high as 49%. As I mentioned above with FHA just because you can be approved that high doesn't mean you will. To be safe with Conventional keep your DTI below 45% and you SHOULD be safely approved. The last item to discuss is your credit score (most people call this your FICO but really FICO is just a score model for your actual score) As you will notice a little bit of a trend here FHA is a bit more lax on your credit score. There are lenders out in the market place that will allow you to get in to an FHA loan with a credit score as low as 580. As I have said before just because you can qualify with a 580 doesn't mean you should. A credit score below 600 is going to require you as a borrower to jump through a lot of hoops. My recommendation in this instance is find a good credit rehab company build your score and wait!!! You will thank me in the long run. Conventional follows the same trend as well which is more times than not you are going to need a higher credit score to qualify. Most lenders are going to cap you at a 620 credit score. In this instance I would offer the same recommendation which is take some time repair your credit and get in to a much easier and better priced loan. I personally have always been bias towards conventional loans because I feel it gives you the borrower the easiest underwriting approval. At the end of the day the best option for you is your decision based off of your personal situation and what you feel most comfortable with. Make sure you always reach out and speak with a mortgage expert to help assist in making the best decision for you.
Finding out how much home you can afford is one of the most important factors in the home buying process. Finding out how much you can afford will always depend on your personal debt, income, and credit score situation, but with a few quick tips we can set you off in the right direction. Tip # 1 - Know your Qualifying Income Knowing the income you can use to qualify is going to go a long way in your mortgage approval process. When it comes to a mortgage the income used to qualify is your gross income (gross income is your income before taxes and deductions) Remember when it comes to income for your mortgage we are looking for income that you can prove through Underwriting, always assume you make less than what you think! Tip # 2 - Know your debts First we have to know what debts will be included and what debts will not. Your credit report is a great indicator of what debts will hit you in the loan process, but if you do not have that readily available we can figure this out no problem. For mortgage purposes items such as cable, cell phone, utilities are not considered in your qualifying debts. You will have to include items like credit cards, student loans, car payments, and any other mortgage related debts. Do your best at including all of your debts. Tip # 3 - Know your Debt to Income ratio (DTI) Getting an idea of your DTI is going to go a long way in figuring out how much you can afford. To figure out your DTI you will simply take your gross monthly income and divide it by your monthly debts we discussed above, the resulting number will be your current DTI. Tip # 4 - Know your loan programs max DTI There are plenty of loan options out there for you the borrower each with their own DTI requirements lets touch on the most popular. FHA - Range of 50 to 55% Conventional - Range of 45 - 50% USDA - Range of 41 - 43% VA - Range of up to 60% (with many qualifying factors) Tip # 5 - Speak with a mortgage expert I cannot stress this one enough! If you want to know what you can actually afford when it comes to buying your home call a mortgage expert, let them dig in to your situation and give you the answers you need. Now that we know a few tips to help you find out how much you can afford, lets go over an example of what that actually looks like. Always remember this will vary depending on your loan program. Here comes the fun part, the math part! Let's assume in this example that you are a borrower that makes $3000 a month in gross income, and you want to do a conventional loan, how do we find out how much you can afford? First let's assume in most conventional loans that your max DTI allowed is 45%. If you are making $3000 and have $0 in monthly debt, you would take your income times 45% which gives you $1350. This means conservatively you can afford a monthly mortgage payment including taxes and insurance of $1350 a month. This is a basic example that almost never comes up because lets be honest who doesn't have some debt? Now we can tweak this same exact scenario really quick by adding in debts. Let's say you have $800 in combined debts between credit cards, student loans, and car payments, this now drops your max allowable mortgage payment including taxes and insurance from $1350 down to $550 a month which will significantly cut down your purchase power. This hopefully give you a better idea of how you can find out how much you can afford monthly for your new home. As always reach out to a local mortgage expert that can help you find the best program for you and your needs.
When it comes to getting a mortgage your credit score is one of the biggest factors that will determine a lot about your loan options, and how your loan will ultimately go. The question that comes up most often is "Do I need good credit?" This is an extremely loaded question because so many factors will go in to your loan decision, but let's give you an easy answer because that is what you came here for - No, you do not need "good" credit, but having bad credit can prevent you from getting a mortgage. Let's dive in to what that really means for you. Lets's first understand the credit score ranges that exist. Credit scores can range from 300 up to 850. This can vary from bureau to bureau because each company uses their own credit and scoring models. Now for you to understand what makes your score go up and down exactly would require you to have an advanced degree in some sort of neuroscience, but just remember this isn't like a golf score so the higher your number the better. Now when it comes to getting a mortgage all lenders are going to require you have a Tri-Merge credit pull, this is a type of credit pull that provides your loan officer and lender all 3 of your credit scores. The three companies that will be used to determine your mortgage credit score will be TranUnion, Exquifax, and Experian. Each of these companies will assign you a score based off of your payment history, credit usage, credit limits, and balances. For the sake of a mortgage your MIDDLE score will be your qualifying score when getting your loan. Now that we know what ranges exist we have to understand that not all lenders will allow you to get a loan with a low credit score. In my industry experience most lenders will not even offer loan options to a borrower if their credit is below 500. So I want you to think when you are applying for a mortgage if I am under 500 I am probably not getting a mortgage. Let's assume you are in a range that would allow you to qualify, and this can vary from lender to lender so make sure you check your options. What does a lower credit score do to your loan options: It may not allow you to qualify for some programs. For example most conventional lenders will not allow you to get a loan below 620. Some FHA lenders will not allow you to get a loan below 580. It may require you to put more money down. Most lenders that lend on lower ranged credit score typically require more money to be put down. Remember all lenders are wanting to lower risk, and more money down means less risk for them. It may restrict the amount of debt you can hold. This can result in you needing a lower mortgage payment (less home for you) or having the need to pay debts off. Higher credit scores can allow you to get in to a loan with as much as 50% Debt to Income. While lower scores can significantly drop that. It may cause your interest rate to be higher. Again back to lenders and risk, they see lower credit scores as higher risk and tend to offer a lot less attractive interest rate options to borrowers. It may cause you to bring more money to the closing table, if you have to bring in a bigger down payment, pay off debts, and take a higher interest rate, these things are all going to result in bigger costs out of your pocket. It may cause the lender to ask you for a lot of documentation, and believe me when I say more documentation is not a good thing. To wrap things up as I mentioned in the beginning you do not need good credit to get in to a mortgage but the experience you have and the costs you pay for it may not be worth it in the long run. My advice to any prospective home buyer is to know your credit, take the time to get your free annual credit report, pay for your credit scores, and monitor your reports. Knowing your credit is the most important step, it allows you to track and make sure your information is accurate. I also recommend if you have lower or bruised credit reach out to a professional that helps with credit repairs and get your credit back on track!
The question of "do I need 20% down?" is one of the most common questions I come across in the mortgage industry. Let's start with the quick and easy answer, NO, you do not need 20% down to get in to a mortgage. This is a bit of a loaded answer so let me explain. The amount of money you actually need to put down is going to depend a lot on what type of loan you are doing, what property type you have, what your DTI is, and what your credit score is. Let's dig into the offered loan programs and find out how much you actually need! Let's start with the fan favorite conventional loans. Conventional loans actually give you the borrower the ability to get in to a primary home with as little as 3% down. To do 3% down on a conventional loan you will need to be either A) A first time home buyer or B) Qualify for the HomeReady or HomePossible loan programs. (High level review of this program - you need to qualify based off of income) for more information on HomeReady or HomePossible check out our other blog post. Now if you do not meet the above criteria for 3% down you can still get in a conventional loan for 5% down. The great thing about the conventional loan offering is you can in most instances get your entire down payment in the form of a gift from a relative! This is a great option if you have relatives that are willing to help you get in to your home. If not always make sure you have 2 months of bank statements to source your down payment. Always remember on any conventional loan that you put less than 20% down you will need some form of Private Mortgage Insurance (PMI) - to learn more about PMI check out our other blog posts. The next loan type on the menu is FHA. An FHA loan will give you the ability to get in to a home with as little as 3.5% down with almost no additional caveats outside of the normal qualifying requirements. You don't have to worry about being a first time home buyer or making too much money. Just keep in mind if you are going FHA it has to be your primary residence. Another great benefit of the FHA program just like conventional is you can use a full gift for your down payment! If you are unable to come up with a gift remember 2 months of bank statements to source your down payment. FHA will also require insurance on the loan, the biggest difference between conventional is no matter how much you put down on an FHA loan you will need insurance. In fact FHA requires two different mortgage insurances - An upfront mortgage insurance (that can be financed in to the loan) and a monthly mortgage insurance (that will be paid for the life of the loan.) Check out our other posts to learn more about FHA mortgage insurance. Next up on the down payment train, VA. VA gives our veterans an awesome incentive where if you are a veteran you can get in a home for 0% down! That's right folks no down payment. If you are working with the right lender you maybe able to get in to your home without a single cent from your pocket. This is assuming you the veteran has full entitlement which we can find on the veterans certificate of eligibility (COE) If everything you just read made no sense then you are probably not a veteran and this loan is not for you any ways :) VA loans will have a VA funding fee attached to it. This is almost like FHA's upfront mortgage insurance, and it is a way the VA can keep funding these no down payment loans for you the veteran. To get a deeper dive in to the VA loan program check out our other posts. Last but not least we have the USDA loan. USDA loans are a bit more on the rare side, but offer another 0% down loan program! Now before you get too excited this does not come without some stipulations. To get in to a USDA loan a few things must be considered. Number 1, where do you live? To qualify for a USDA loan you the borrower must live in a rural area that is approved for USDA funding, these areas can sometimes be few and far between. Number 2, how much money do you make? This is usually the biggest road block to getting in to a USDA loan. The USDA loan program takes into consideration not only how much you the individual borrower or borrowers make, but the house hold income for anyone over 18 living in the property. Weird right? Before you get your hopes up on this loan make sure you talk to a local loan officer to see if you qualify. USDA loans will require you to pay a Guarantee fee, this is similar to FHA, and VA which is a fee upfront financed into the loan to keep the loan program funded. So there you have it, a very long answer to a very simple question! Always remember how much you can put down will depend on your individual situation, and not to sound like a broken record, but always reach out to an expert to help you find out the best loan for you!
When looking into buying your home it is always good to know what options you as a borrower have at your disposal. Today we take a few minutes to dig into the under used but extremely beneficial HomeReady and Home Possible loan programs. Let's answer the first question "what is HomeReady and Home Possible?" These two programs fall under the conventional loan bucket. HomeReady is a Fannie Mae underwritten loan and Home Possible is a Freddie Mac underwritten loan. What does that mean to you? not much outside of your loan officer will help identify which option is better for you. We will weed the two out below. Let's dig into HomeReady first. HomeReady as I mentioned before is a loan program under Fannie Mae, this is a conventional loan option that reaps all of the conventional underwriting benefits that most borrowers and lenders love. HomeReady allows you the borrower to get in to your home for as little as 3% down! This program also offers a few other benefits to you as a borrower, the most important one and what I think makes the program so advantageous is a reduced mortgage insurance factor. In simple terms this means to you the borrower that if you have mortgage insurance (MI) on your loan you are going to have a cheaper MI payment. This is great for you the borrower for a few reasons: A lower MI payment means a lower overall payment. A lower overall payment means a better chance for your approval. A lower payment, and a lower DTI allows for you to buy more home! Now I know you are probably thinking if I am going to get all these benefits there must be a catch, and guess what you are right on! HomeReady does require that you qualify based off of what they call an AREA MEDIAN INCOME (AMI) Fannie has essentially put together income limits all across the country, and basically have put it simply if your qualifying income is below the AMI for where you live you can do the loan, if not you cannot do the loan. Pretty simple if you ask me! So how do you know your AMI? Fannie has put together a nice little tool where you type in the address, or search the area you are looking to live and poof your AMI is given to you. Check the link below to search your area. (Keep in mind you are allowed to go up to the program specific AMI, which the tool will indicate for you.) https://ami-lookup-tool.fanniemae.com/amilookuptool/ A little tip that most people miss on this loan offering is this program uses QUALIFYING income. This is an important term to understand, qualifying means what income you actually need to make the loan work based off of your Debt to Income (DTI). Quick example - You live in an area where the AMI is $61,0000, you make $75,000 a year, $50,000 of that income is a salary, and the other $25,000 is bonus. Now you the borrower only needs to use your $50,000 to qualify because the rest of your Debt to Income is in line you now qualify for that program. On the flip side if you needed every bit of that $75,000 to make the loan work you cannot use this program. Make sure when you are shopping for your loan you ask these questions of your loan officer, it can save you in the long run. Let's fly through Home Possible. I will make this easy for everyone reading along here (all 3 of you!) These two programs have very similar rules and structures. Basically take all of the information above and apply it to the Home Possible program. Now these two are not exactly the same for once Home Possible is a Freddie Mac program instead of Fannie Mae, and Home Possible can possibly have a different Area Median Income allowance. Check the link below to search your area. (Keep in mind you are allowed to go up to the program specific AMI, which the tool will indicate for you.) https://sf.freddiemac.com/working-with-us/affordable-lending/home-possible-eligibility-map Always make sure before you hop in to the first loan you are offered or something you find online you take the time to ask questions about what loan works best for you. Remember this is one of the biggest financial decisions of your life, why not take a little bit more time to make sure you get in the best situation for yourself and save a little money in the long run!