An 80-10-10, what??

Several of my clients are buying new construction homes.  This sometimes put them in a unique situation because typically the builder wants to see a mortgage approval prior to starting to build their home.  Some of my clients simply cannot afford to own two homes.  So they have to sell their home and find interim housing.  Some can afford two homes, but don't want to.  They move forward with the hopes their home will sell quickly, when their new home is nearly complete.  I like to come up with plan A, plan B, and sometimes plan C for my clients in those situations.  Of course, plan A, is to sell their home.  But what about plan B and plan C?

One of those plans that I normally suggest is an 80-10-10.  This option is available for all clients, not just new construction clients, but often works well for their situation in particular.  So lets discuss what an 80-10-10 is.

To keep it simple, an 80-10-10 is two mortgages, a first and a second.

Most first mortgages will be 80% of the value of your home.  This keeps your loan under the threshold for needing mortgage insurance.

Then your second mortgage will be 10% of the value of your home.  This mortgage can be a loan or a credit line.  It can also be a fixed or variable rate loan.  

This number is the percentage that the client will need to use as a down payment.

Keep in mind, these numbers do not have to be an 80-10-10.  For example, they could be a 75-15-10.  The simple rule of thumb, is that the second mortgage cannot exceed the first.  So the first number always has to be the largest.

So why would a client opt to do an 80-10-10?

• As long as the first mortgage is 80% of the value of the home, there is no mortgage insurance.  This is a great benefit to the borrower when looking at their monthly figures.
• This would help a jumbo purchase price avoid strict jumbo underwriting criteria.  Such as cash reserves and higher credit requirements.
• When doing a home equity loan for the second, the borrower will always have a line of credit available if they ever need it, even once they pay it off.
• Going back to our first scenario, for new construction clients, or any clients purchasing a home prior to the sale of their current home, they can use it as a bridge mortgage.  Once they sell their current home they can pay the 2nd off completely.

All those benefits do not come without some risk.  Generally, these 2nd mortgages are interest only for the first 10 years.  Which means that your payment will increase to include paying down your principle. Additionally, the rate is typically adjustable with what the prime rate is as the time.  And of course, until it is paid off you will have two payments - your first and your second.

An 80-10-10 is a good option to consider for many buyers.  If you wanted to see some numbers and comparisons to help make your decision, please let us know.

Mortgage Guideline Tip - Dreaming of a Vacation Home?

Have you always dreamed of owning a vacation home?  It's not a decision to be taken lightly, but if it is something you've always wanted, the means for making that dream come true are not as difficult as you might think.


Here's some things you should know:

Conventional Financing - Purchasing and financing a second home is a little different than purchasing a primary home.  Some of the low down payment programs are not available but with conforming loans, as little as 10% down can get you started.

"Cash Out" Financing - Are you thinking about a cabin in the woods, a summer cottage, ski or golf course condo? Unique properties may have appeal, yet they may also need non-conventional financing.  If you can, using equity from a primary home via refinancing can be a smart solution that also provides you with a "cash buyer" status.

Rental Income - You should never purchase a vacation home if you're dependent on rentals to make it work.  However, if you will hire a manager and don't mind sharing, the income can be a great subsidy.

Tax Benefits and Appreciation - You should always check with your tax pro, but owning a second home can still carry tax advantages that serve to reduce the actual cost of owning.  Appreciation is never guaranteed, yet over time value increases can reward you handsomely for decisions made today.

If you think you are ready to find out more information on second-home ownership, call us.  We'll be happy to help identify the best way we can help you reach your goals today.

Mortgage Guideline Tip: Qualifying debt to income ratios

A  major factor in qualifying for a mortgage is the borrower's debt to income ratio (DTI).

When calculating your debt to income ratio, you first add up all of your monthly minimum debt payments and then divide that by your gross monthly income.  Your potential future mortgage payment is put into that ratio.  

For example if you have a $200 car payment, $100 dollars in credit card debts, and your future mortgage payment is going to be $1200, you add them up and they total $1500 in total monthly debt.  ($200 + $100 + $1200 = $1500).  You only want to include payments that would be on your credit report for this.  Payments like an electric bill or car insurance do not get calculated in.  

Then say your monthly gross income before taxes and deductions is $5000.  To calculate your DTI, you would divide $1500 (your monthly debt) by $5000 (your monthly income).  This equals 30%.    So that means your DTI is 30%.  ($1500/$5000 = .300 or 30%).

Typically to qualify for a mortgage, you don't want your debt to income ratio to exceed 43%.  In some cases, with some loan programs, you could qualify with a higher DTI.  It is important to note that to qualify for a higher DTI you must have compensating factors.  These factors include a great credit score, a steady employment history, and a nice amount of savings.  I would advise to keep 43% in your mind as a qualifying DTI until getting pre-approved at a higher amount from your lender.  

I have outlined the highest possible qualifying DTI ratios below for each loan program.

VA Loans: the highest possible DTI is 60%. (only a possibility with a credit score greater than 660)

FHA Loans: the highest possible DTI is 50% (only a possibility with a credit score greater than 620)

USDA Loans: the highest possible DTI is 43%

Conventional Loans: the highest possible DTI is 45%

Jumbo Loans: the highest possible DTI is 43%

Delaware's First Time Home Buyer Program - highest possible DTI is 45% (660 credit score required for this program).

During a pre-approval we will ask what your desired purchase price and monthly payment is, and see if you can qualify for that.  We can also show you what your max would be, which is determined by your DTI.  This will help us provide affordable estimates to you that will show you what your payments would look like.

You don't have to figure how much you could qualify for alone.  Please reach out to us at anytime.

For the second time home buyers....

Some of my conversations with second time home buyers start off with uncertainty of where they should begin.  Particularly the ones who currently still own their first home.  While some buyers know their plan and just want my assistance making it happen, others want to consider different options.  The most important factors to consider when making your decision about what to do with your current home are affordability and how comfortable you as the buyer feel.

There are a couple scenarios that you can do with your current home.  Of course, you could sell it.  The obvious benefit of selling your home would be that hopefully you will get net proceeds from it.  That would provide you with a nice down payment for your new home purchase.  The downside is you either have to coordinate a same day settlement with your new purchase, which may or may not be an easy task, or find intermediate housing while you are continuing your home search or waiting for your new home to be built (in the case of new construction).

Another scenario would be converting your home to a rental.  We outlined what is needed to do that in a previous post.  Click here to review.  Of course, the benefit of converting your home to a rental is rental income.  We have had clients who chose to refinance prior to converting their home to a rental due to the real estate market conditions.  There are some downsides to this as well, not everybody wants to be a landlord.  It is important that you can make an educated decision specific for your situation.

Mortgage insurance (PMI) is another topic that I have found second time buyers are more concerned about than their first time around.  If you are not selling your current home, or getting net proceeds from the sale of the home, it is a good idea to save for your downpayment.  Having at least 20% to put down will allow you to avoid being locked into PMI fees.  If having 20% down is not an option, there are lender paid mortgage insurance options that are available .

One thing that I hope there is no uncertainty about is making sure you qualify to purchase a new home before you make plans to sell or rent your current home.  I strongly suggest that you speak with a lender about your plan and become pre-approved for that plan, whether that plan is selling, or renting, or lender paid PMI..  We can provide estimates for each scenario that you are thinking about doing so you can feel confident in your decision.

Please contact us with any questions about purchasing.  We would be happy to help guide you through the mortgage process for the first or the second time around.