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.

Mortgage Guideline Tip - Converting Your Current Home Into A Rental Property (Qualifications)

I have many potential home buyers looking to convert their current home into a rental property so they can buy a new home.  The first thing a lender will ask is "why are your looking to do this?" Typically,  there are 2 reasons:

1. Not enough equity in your current home to sell
2. Looking to grow future wealth

Underwriting guidelines have changed over the past few years for this type of transaction.  When the economy went thru a downturn in 2008, many homeowners were telling banks that they were converting their home into a rental and as long as they showed the underwriter a lease, the mortgage obligation would be offset by rental income which would allow them to buy a new home.  

As soon as this home buyer was in their new home the rental property would become delinquent and finally foreclose on.  This was happening throughout the country, rapidly.  The reason this was happening was due to declining values and homeowners could not sell without taking a loss.  This forced the mortgage industry to change guidelines.  

At that point there were two categories a buyer could fall into.  One category was a buyer who had less than 30% equity and one that had more than 30% equity.  The two categories had different requirements for the borrowers.

Other mortgage guideline policies are now in place that adequately address credit history, rental income, and assets.  This has allowed Fannie Mae to change their requirements associated with converting a principal residence to a second rental. 

There are no longer two categories of buyers.  Now all buyers utilizing a Fannie Mae loan. who would like to convert their current home into a rental property are subject to the following guidelines:

1. Have a signed, one year minimum, lease agreement with a tenant
2. There has to be proof of the security deposit in your account

The rule still stands that 75% of the rental income will be used to offset the monthly payment.  When current lease agreements are used, the lender must calculate the rental income by multiplying the gross rent(s) by 75%. The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.

If you have questions about converting your current home into a rental, my team and I be happy to help! 

Mortgage Guideline Tip - The Big Decision...Rate Locks

It's all about risk.  Between the times you start your application and the time you close your  loan, interest rates will do what they always do - change.  At times, the rate of change is exceptionally volatile, even from one minute to the next.  "Locking in" your interest rate protects you from the risk of rising rates.  It's just like purchasing an insurance policy.



Risk is not a one-way street, though.  Protecting yourself from rising rates means your transfer that risk to the lender.  In turn, lender must purchase "hedges" to prove protection.  These are financial instruments such as U.S. Treasury Bonds whose values move in the opposite direction of rates.  A hedge can be expensive, and just like other forms of insurance, longer policy periods cost more. As a result, longer locks have higher costs, which are reflected in the cost of your loan.

Risk varies based on the type of loan.  Before you decide whether to avoid or pay the premium for a longer lock, take into account the kind of loan you are considering.  Different loan types may have less volatility in the rate from week to week.  For example, an adjustable rate loan may be tied to a slow moving index rather than the day to day market.  

No one knows with absolute certainty what interest rates will do during your application and approval process.  One thing is certain: Your loan has to be locked before it can close.  For many, the decision is better made based on personal comfort rather than skill in predicting the markets.  If you will be most comfortable knowing your safely locked in, then a longer lock may be less stressful than taking your chances on getting a better rate later.

Whether you choose to lock in early or lock in closer to your closing, we are here to help.  Please do not hesitate to contact us with any questions!

Mortgage Guideline Tip - The Refi Process

Searching for information regarding refinancing? 
I have put together a quick summary of the process from application to closing below.  

The Application
After we determine that a refinance will be beneficial for you, we start the application.  Much like your original mortgage application, this one collects general information and asks for documentation of your income and assets.

Processing
Next, we'll gather property information with an appraisal, title reports, and proof of property insurance.  We'll also request a credit report and verify your income and your assets.

Underwriting & Approval
The underwriter makes sure all loan guidelines are met or exceeded by verifying the information we've provided.  A long checklist of factors must be satisfied during this stage.  Additional documentation may be requested or "conditions" may be placed on the approval.  Ultimately, the underwriter is held responsible for the decision made on a loan and must assure that anyone else picking up the file would come to the same conclusion.

Closing/Funding
After conditions placed on the approval have been satisfied, your loan is cleared for "docs" or closing.  Your closing package will be compiled, a closing disclosure will be approved, and then your closing will be scheduled and completed.  On loans for primary residences, a three-day rescission or waiting period must transpire between closing and the funding of the new loan.  After the rescission, your old loan will be paid off and your new loan will start.

Every property and situation is unique.  Many small steps may occur within the four categories, and even a small issue could temporarily derail the process.  Things may have changed since you originally financed your home, and the documentation needed today may be more extensive than it was when you first purchased your home.  Please realize lenders must take steps to satisfy guidelines that are designed to protect you and everyone else along the way.

If you have questions about the refinancing process, please call or email us today! We are here to help!

The Weekly Wrap Up - 80s Night at the Queen

 

Fed minutes show that members think the economy can handle a policy rate increase. Over 70% of economists now think the Fed will hike rates in December.

Markets have already started preparing for a Fed policy rate increase in December, contributing to recent mortgage rate increases.

Weakness in retail sales and producer prices make it unlikely that inflation will rise significantly. Low inflation can help mitigate a trend toward rising rates.

World Cafe Live at the Queen

Nov. 21. 2015
6 PM to 11 PM

Time to enjoy the 17th Annual Fall Auction Gala thrown by Autism Delaware.  Go back to the 80s with a fun dance party with live music and a silent auction.  Ticket are $95, which covers the live music, cocktails, food plates, and live and silent auctions.  Proceeds go to support Autism Delaware programs and statewide services.

There is complimentary garage parking in the Renaissance Center Garage of 5th Street, right next to the World Cafe Live.  For more information about the event or Delaware Autism click here...

Housing starts were down in October due to a decline in apartment construction. Overall though, the trend in housing starts has been steadily improving.

Highlighting the housing market's strength, building permits were up 4.1%. Permit activity portends more supply and healthy construction spending.

Homebuilders continue to remain upbeat about the market and outlook for real estate. Strong demand and limited inventory make new homes essential.

Mortgage Guideline Tip - Pre-Qualification vs. Pre-Approval

We often have conversations with our clients regarding the difference between a pre-qualification and a pre-approval.  Some clients believe that these are the same thing.  It is important to know that just because you are pre-qualified does not mean that you are pre-approved.

Pre-qualification

The process to get pre-qualified is extremely simple.  You have short conversation with your lender about your income, credit, and assets.  At this point credit is not pulled, only verbal information is exchanged.  The result of this will allow you, the borrower, to know what kind of housing payment you could be qualified for.  It is important to note that that number is not a definite.  This is because the lender if going off of all verbal information that you are providing to them, nothing is being confirmed. Due to that a pre-qualification does not mean the same thing as a pre-approval.

Pre-Approval

The pre-approval process is also fairly simple, but is more involved than the pre-qualification process.  During this process, information regarding your income and your assets will be collected.  Your credit will be pulled by your lender and then uploaded into an automated underwriting system that will grade your overall risk for the loan.  When this process is completed, you will have a more accurate idea of what you can afford, and you will receive a pre-approval letter for that amount.  You do not get a similar letter during a pre-qualification.  This pre-approval letter will give you purchasing power and you will be able to confidently make an offer on the house that you find that you love.

Pre-Qualification vs. Pre-Approval

I hope this paints a clear picture about the difference between a pre-qualification and a pre-approval. 

If you have any questions please call or email me!

The Weekly Wrap Up - A Community Favorite; Wilmington Beer Week

October's jobs report supports speculation the Fed will raise policy rates at the December FOMC meeting. Unemployment improved and job growth surged.

Steady jobless claims this week were further evidence of a healthy labor market and the growing likelihood of the long anticipated Fed policy action.

Mortgage rate markets are already moving in advance of the December Fed meeting. Increases so far are small and can actually motivate buyers to action. Wilmington Beer Week Friday Nov. 13th & Saturday Nov. 14th It is not too late to catch the end of Wilmington's 5th Annual Beer Week!  The week­long celebration will showcase a WBW-record 61 craft brew­eries while featuring din­ners, tap takeovers, meet the brewers and more. Delaware breweries will be promi­nent in that lineup, so look for the latest creations from 16 Mile, 2SP, Dogfish Head, Evolution, Fordham, Mispillion, Third Wave and Twin Lakes. Top regional brew­eries represented include Flying Fish, Heavy Seas, Lancaster, Stoudts, Troegs, Victory and Yards.  This is a great opportunity for residents in Delaware, Maryland, and Pennsylvania to have a fun and relaxing evening! For more information about times and schedules please click here.

Encouraging potential buyers to move off the fence, rents are increasing in all price brackets. Rents rose an average of 6.2% year-over-year.

A 12% rise in foreclosures in October is attributed to lenders acting before the holiday moratoriums. Foreclosures have been declining steadily for several years.

Purchase mortgage applications appeared unfazed by the recent climb in rates, improving .1% week-to-week. That's an 18% increase over this week last year .

Mortgage Guideline Tip - Waiting period for derogatory credit

Several of our clients come to us after some sort of mishap with their credit or previous mortgage.  Whether it was a foreclosure, short sale, or bankruptcy, they all ask the same thing.  When can I purchase again?

It is an important question for the borrower to know so that they can prepare.  The complicated part is that different derogatory credit requires different waiting periods, for different loans.  I have compiled a list that shows the waiting period that is required for each loan.

Conventional Loans - 

• Chapter 7 Bankruptcy - 4 year from the discharge or dismissal date
• Chapter 13 Bankruptcy - 2 years after the discharge date or 4 years from the dismissal date
• Multiple Bankruptcies - 5 years from the most recent discharge o dismissal date
• Foreclosure - 7 year waiting period is required, and is measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower
• Short Sale - 4 year waiting period is required

FHA Loans - 

• Chapter 7 Bankruptcy - 2 years from the discharge date
• Chapter 13 Bankruptcy - 1 year waiting period is required.  Plan must be paid out and discharged prior to closing.
• Foreclosure - 3 year waiting period from settlement
• Short Sale - 3 Years waiting period - Extenuating Circumstances apply

VA Loans - 

• Chapter 7 Bankruptcy - 2 years from discharge date
• Chapter 13 Bankruptcy - 1 year waiting period.  Plan must be paid out and discharged prior to closing.
• Foreclosure - 2 year waiting period from settlement
• Short Sale - 1-2 years waiting period.  If less than 2, a letter of explanation is required from the borrower and supporting documentation to establish an extenuating circumstance and to confirm the short sale was not due to credit negligence or taking advantage of a declining market

USDA - 

• Chapter 7 Bankruptcy - 3 years since date of discharge
• Chapter 13 Bankruptcy - 3 years from date of discharge
• Foreclosure - 3 years since settlement
• Short Sale -  None

If you are unsure what waiting period you fall into, please call or email me with any questions.

The Weekly Wrap Up - Kicking off the holiday season at the Nemours Mansion..

The number of economists predicting a Fed policy rate increase in December continues to rise. Markets are starting to prepare now, contributing to higher rates.

Although jobless claims recorded their largest increase in 8 months, they remain below 300,000. The overall sentiment is a healthy labor market, bad for rates.

Increased manufacturing productivity reported for the 3rd quarter signals economic improvement. A strong economy increases the likelihood of higher rates.

 Nemours Mansion & Gardens Holiday Tours

Kicking off this Saturday November 7th - Sunday January 3rd.
Every Tuesday-Saturday 9:30 am, 12:00 pm, and 3:00 pm
Every Sunday - 12:00 pm and 3:00 pm

The holiday tours at Alfred I. DuPont's former mansion are starting this weekend.  Enjoy the magic and elegance of the Nemours Mansion.  The beautiful Christmas trees with ornaments from the early 1900s to present day will inspire you this holiday season.  The tours are 2-3 hours long, showing you the mansion and the gardens.  This is a huge attraction to residents in Delaware, Pennsylvania, and New Jersey.  Read more about the tours and the mansion by clicking here...

At 9.3% of the market, distressed sales (including REO and short sales) continue to drop. If current trends continue, they will reach 2% of the market by mid-2018.

Home prices nationwide rose by 6.4% in September. CoreLogic's HPI forecast projects home prices will rise 4.7% year-over-year from Sept. 2015 to Sept. 2016.

Construction spending for single-family homes rose 1.3% in September. Private residential construction spending rose to the highest level since January 2008.

Mortgage Guideline Tip - Mortgage Payment and Cash to Close

When it comes down to it, as consumers, we all want to know the bottom line, the numbers.  It is important to understand what you are paying for something and why.

Two things that we spend a lot of time discussing with our clients is their monthly mortgage payment and their cash to close.  We provide a total cost analysis to all of our clients around the time they are pre-approved.  This analysis breaks down the the estimated monthly payment, and cash to close and are made to every client's unique situation.  So what makes up a mortgage payment?

A mortgage payment consists of 4 or 5 components.

• Principle - The part of your payment that goes towards paying the original amount of money borrowed
• Interest - The charge for the use of the borrowed money
• Taxes - These are assessed by your country.  The tax amount is specific to each house
• Homeowners Insurance - This insurance protects your home, you pay 1/12 of the annual amount each month
• Mortgage Insurance - This insurance protects the mortgage and may be required if your down payment is less than 20%

Closing costs can vary per transaction.  In addition to your down payment, here is a general list of what to expect.

• Lender Feeds
• Loan Origination - This is the total cost the lender collects to pay for the necessary items for your transactions, including processing, underwriting, closing, and flood certification.
• Appraisal - This fee is collected up front which goes to the appraiser so he can access the value of your new home
• Title/Attorney Fees
• Title insurance - owner's coverage and lenders coverage
• Survey of the home
• Settlement Fees - Attorney or Title company fees to complete legal services
• Government Fees
• Transfer Taxes - Each state will require a percentage of the sales price
• Recording Fees - State/county recording fees
• Prepaid items/Escrow Account 
• Property Tax
• Hazard Insurance
• Interest per day
• Mortgage Insurance (if applicable)
• Other (if necessary)
• Home owners association dues
• Radon test
• Pest inspection
• Well and septic test
• Home inspection

It is important to make sure your lender is knowledgeable in the area you are buying in to ensure your estimates are as accurate as possible.  If you have any questions about monthly payments or closing costs or would like a total analysis of your own, please contact me today!

The Weekly Wrap Up - The Not So Scary News!

Solid domestic consumer demand helped 3rd quarter GDP estimates to increase 1.5%. Strong economic news can lead to higher rates.

As expected, the Fed did not raise policy rates at this month's FOMC meeting. However, the statement contained language making a hike in December possible.

The four-week average for jobless claims is the lowest since 1973. A strong labor market helps strengthen the economy and could lead to higher rates.

Boo-B-Que by the Sea!

Friday Oct. 30th - Saturday Oct. 31
39415 Inlet Road
Delaware Seashore State Park
Rehoboth Beach, DE

This is a family oriented two day event that will include live music entertainment, craft, food and beverage vendors, rides and games, and more!  There will also be several competitions including Halloween decor competition, a costume contest, a wing competition, and of course, a youth and adult BBQ competition.  In state cost to get into the park is $5, out of state is $10.  Those with a seasonal state park pass are free!  Enjoy a great time and great food! Read more about the event here.

Have a fun and safe Halloween everyone! It looks like the weather here in Delaware, Maryland, and Pennsylvania will be perfect trick or treating weather and other Halloween events!

New home sales fell in September after two straight months of gains. However, the drop is seen as temporary, and demand for housing remains strong.

In fact, the homeownership rate rose between July and September, the first rise after 7 quarterly declines. Buyers under 35 years old had the highest increase.

First time homebuyers are depending less on gift funds for down payments. More young buyers are using personal savings for down payments and closing costs.