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Mortgages - 101 and Pro-Tips |OT
- Thread starter Hokahey
- Start date
That's the general rule, yeah, but you of course have to take into consideration your other expenses. Like, whether or not you have kids, car payment(s), etc.
Also property taxes I'm guessing, but aren't those added to the mortgage payments, correct?
OP
OP
I will assume you are not referring to qualifying for a mortgage, but instead what you can actually afford.
To be blunt, please don't use a random formula to determine this.
Make a budget.
1. Determine your monthly income.
2. Add up the average of every monthly expense you have - excluding rent or current housing payment.
3. Subtract expenses from income and determine bottom line.
4. Determine how little you would be willing to keep of that bottom line as extra each month.
5. Subtract #4 from #3 and you have the housing payment that makes sense for you and your family.
6. Have a loan officer help you determine how much house that monthly payment would represent.
I'm assuming mostly to avoid being house poor. I've seen many people qualify for mortgages and sign them only to get killed with the extra expense and basically living paycheck to paycheck once they start living their homes. Also these people have rather nice salaries, but since the ratios were off they were mostly house poor and the household income was a moot point.
Usually it's paid out of an escrow account that is part of your payment. Obviously, once you have the house paid off you have to pay it yourself directly to the city.
Meh. I just went with lowest apr I could find and put 10% down. PMI will end up costing about 5k but it's worth it to me. I'd rather have extra cash in Bank account. The whole process seemed VERY simple.
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Absolutely. Most people qualify for far more house than they would actually want to pay for each month. That's why working backwards and with a budget is paramount. I do this with most of my clients. By way of a budget, we determine the housing payment they can afford, and then work up a mortgage that reflects that payment based on current market rates, etc
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If your paperwork is in order, you easily qualify, you get lucky with a good lender, and don't care about the fine detail - it can seem very easy. For sure.
For example - lowest APR is not necessarily the lowest note rate, which is what your payment is based off of. APR in the mortgage world is simply a reflection of the note rate + fees. And best of all, APR is usually an estimated figure. Do this - ask any LO what an APR is comprised of and tell me how many different answers you get.
I can't tell you how many times someone has told me they're getting a better APR from someone else, yet when we review the figures, the rate and the fees are higher because it's an "estimated APR."
Or, my APR is slightly higher because my fees are indeed higher. But my rate is lower. And by paying an extra $500 in fees with me, the payment is also $50 lower a month. So in 10 months, that client would break even and forever save more with me. Make sense?
Sure, but it's not as complex as you are describing. In fact that's the reason why I went with random online company. They had higher fee but % was lower AND they tend to offer much lower PMI (in my case it's about 75 bucks a month for 5 years for putting only 10% down for 320k mortgage).
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No, it's definitely not complex to look at numbers on a screen to make a decision. But that does not necessarily mean that you get the best deal that way. Everything about the numbers are negotiable. That's why I highly advise using an actual human being that is in your Market. From that perspective, it is far more complex. But I understand that the trend with consumers is to feel more comfortable punching numbers into a software tool, having number spit back out and measuring them against them other numbers, while eliminating their negotiating power and ability to customize a product that makes the most sense for their life and financial goals. Mortgages should not be treated like ordering a cheeseburger.
Just a quick thought/note on how much someone can afford and being house poor. I think Hokahey has been giving some great advice that you really need to plan and budget beforehand instead of using some "rule of thumb". Any loan officer that's worth using should be able to help you with this process.
Just because you are pre-approved (and hell, even lender approved) for a mortgage doesn't mean you can actually afford it. I can approve a loan that has a 50% DTI which is absolutely insane in some cases. And you have to remember that we qualify you based on GROSS income, not NET INCOME. Add in all the extra costs of owning a home that we don't take into account for your DTI and you could find yourself living paycheck to paycheck real quick.
For example, say you are "debt free" on your credit report (no auto loans/leases, all your credit cards currently have a $0 balance, and you have no student loans). You make $3,200/mo in gross income. As you are looking at homes you find a house that you think is out of your price range and your gut is telling you to forget about it, but after speaking to a Loan Officer you find out you can get pre-approved for this house. Awesome! You go through the entire loan process and close on the home with a monthly mortgage payment of $1,575 (you've decided to escrow and this includes principal, interest, taxes and insurance); since you had no other debt reporting on credit we've just approved your mortgage with a DTI of 49.22% ($1,575 / $3,200). That's all fine and dandy, but you don't actually take home $3,200/mo. Don't forget all your payroll deductions that aren't factored into your DTI such as income taxes, health insurance, 401k contributions, etc... You now have a significant portion of your take home income being used to pay just the mortgage. Oh, and now you have the extra expenses of owning a home - gas bills, electric bills, water bills, cable/internet. You now might just be scraping by paycheck to paycheck just to pay the mortgage and house related bills - hopefully you don't want to lease a new car or expect to be paying credit cards in full each month. You are now a house poor homeowner that really should have listened to their gut instincts. And if you really didn't do your planning and spent all your savings trying to put a down payment on the house you better keep your fingers crossed nothing will go wrong with the house (spoiler alert - things will go wrong) because they get expense very fast. One blown furnace in the middle of winter could easily put you underwater.
Bottom line - do yourself a favor and do some planning/budgeting before you buy. A house will likely be the biggest investment in your life, so don't just guess about everything and rush into it. If you want to buy a house start planning immediately so that once you do start looking you are confident that you can pull the trigger on that perfect home you found.
I'm not trying to scare anyone away from buying a house, but we're far enough removed from the housing crisis that the guidelines that lenders have to follow are being more and more relaxed each month so that more people can be qualified to buy a house.
Just because you are pre-approved (and hell, even lender approved) for a mortgage doesn't mean you can actually afford it. I can approve a loan that has a 50% DTI which is absolutely insane in some cases. And you have to remember that we qualify you based on GROSS income, not NET INCOME. Add in all the extra costs of owning a home that we don't take into account for your DTI and you could find yourself living paycheck to paycheck real quick.
For example, say you are "debt free" on your credit report (no auto loans/leases, all your credit cards currently have a $0 balance, and you have no student loans). You make $3,200/mo in gross income. As you are looking at homes you find a house that you think is out of your price range and your gut is telling you to forget about it, but after speaking to a Loan Officer you find out you can get pre-approved for this house. Awesome! You go through the entire loan process and close on the home with a monthly mortgage payment of $1,575 (you've decided to escrow and this includes principal, interest, taxes and insurance); since you had no other debt reporting on credit we've just approved your mortgage with a DTI of 49.22% ($1,575 / $3,200). That's all fine and dandy, but you don't actually take home $3,200/mo. Don't forget all your payroll deductions that aren't factored into your DTI such as income taxes, health insurance, 401k contributions, etc... You now have a significant portion of your take home income being used to pay just the mortgage. Oh, and now you have the extra expenses of owning a home - gas bills, electric bills, water bills, cable/internet. You now might just be scraping by paycheck to paycheck just to pay the mortgage and house related bills - hopefully you don't want to lease a new car or expect to be paying credit cards in full each month. You are now a house poor homeowner that really should have listened to their gut instincts. And if you really didn't do your planning and spent all your savings trying to put a down payment on the house you better keep your fingers crossed nothing will go wrong with the house (spoiler alert - things will go wrong) because they get expense very fast. One blown furnace in the middle of winter could easily put you underwater.
Bottom line - do yourself a favor and do some planning/budgeting before you buy. A house will likely be the biggest investment in your life, so don't just guess about everything and rush into it. If you want to buy a house start planning immediately so that once you do start looking you are confident that you can pull the trigger on that perfect home you found.
I'm not trying to scare anyone away from buying a house, but we're far enough removed from the housing crisis that the guidelines that lenders have to follow are being more and more relaxed each month so that more people can be qualified to buy a house.
OP
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Can you explain why paying cash is an incentive to sellers? Do sellers not get all the money up front from the bank regardless?
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Because it's a guaranteed sale. If someone needs a loan to buy the house, and is working with a crappy lender, their mortgage pre-approval might not be worth the paper it was written on.
Too often, mortgages get declined after the seller is under contract with the buyer. Then the seller is out of luck and has to go to the backup offers or relist.
Didnt realize that was a common enough issue to be a problem.
I always thought you go under contract after final approval or something.
Hey Hokahey, I'd love to get your opinion on whether I should look for different mortgage offers or if the one I have is fair.
I was pre-qualified through a mortgage broker for a 30-year, $160,000 mortgage at 4% interest (based on an estimated $200,000 sale price where I'd plan on paying the 20% down) and the estimated closing costs are at about $9,000, which seems about right given what I'd read about closing costs (they should be about 2-5% of the sale price).
The confusing part to me is that in the cost worksheet provided by the broker there are separate line items lumped into a category called Prepaid Items/Reserves that are about another $6,000. These items include Daily Interest Charges, Hazard Insurance Premium, Hazard Insurance Reserves, and County Property Tax Reserves. As a first time home buyer, I didn't realize that the broker would collect all of those payments up front (I didn't know much about escrow before last week, either). Should these Prepaid Items/Reserves be considered closing costs or are they really their own separate thing? If they are part of the closing costs, then I'd be paying about 7.5% of the sale price in fees up front which doesn't seem like a good deal, especially because my credit score is hovering awfully close to 800.
It may be a good mortgage offer, but I'm just unsure about how to interpret all of the costs, so if you could help set me straight, it'd be greatly appreciated.
I was pre-qualified through a mortgage broker for a 30-year, $160,000 mortgage at 4% interest (based on an estimated $200,000 sale price where I'd plan on paying the 20% down) and the estimated closing costs are at about $9,000, which seems about right given what I'd read about closing costs (they should be about 2-5% of the sale price).
The confusing part to me is that in the cost worksheet provided by the broker there are separate line items lumped into a category called Prepaid Items/Reserves that are about another $6,000. These items include Daily Interest Charges, Hazard Insurance Premium, Hazard Insurance Reserves, and County Property Tax Reserves. As a first time home buyer, I didn't realize that the broker would collect all of those payments up front (I didn't know much about escrow before last week, either). Should these Prepaid Items/Reserves be considered closing costs or are they really their own separate thing? If they are part of the closing costs, then I'd be paying about 7.5% of the sale price in fees up front which doesn't seem like a good deal, especially because my credit score is hovering awfully close to 800.
It may be a good mortgage offer, but I'm just unsure about how to interpret all of the costs, so if you could help set me straight, it'd be greatly appreciated.
Wife and I are quickly realizing that the house we bought in the fall of 2016 is too small for our needs. We've had a second kid since then (so now an almost 4 year old and a 1 year old) with no dedicated play area and their rooms are too small to be used as playrooms.
So, long story short we're looking to upsize just so slightly. I'll need a dedicated office since I work remotely and maybe two additional living spaces.
Is Rocket Mortgage worth going through to get preapproved? As I understand it it's kind of like Geico where there's no local agents you'll deal with but instead a call center system. I've had a good experience with Geico so far, but there's probably less at stake with insurance than mortgage applications.
If not, how do have you guys gone about finding who to go with to get preapproved? The previous two times we've gone with either who our agent recommended or in the current situation our credit union.
So, long story short we're looking to upsize just so slightly. I'll need a dedicated office since I work remotely and maybe two additional living spaces.
Is Rocket Mortgage worth going through to get preapproved? As I understand it it's kind of like Geico where there's no local agents you'll deal with but instead a call center system. I've had a good experience with Geico so far, but there's probably less at stake with insurance than mortgage applications.
If not, how do have you guys gone about finding who to go with to get preapproved? The previous two times we've gone with either who our agent recommended or in the current situation our credit union.
In my case, I found an amazing agent to work with. From there I asked them if they had recommendatations for lenders or brokers and went from there.
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Yeah that probably seems the easiest route. We met an agent we really liked at an open house. I just am weary of unknowns in a relationship between agents and brokers, if that makes sense.
OP, this post is amazing. I'd love more information re: selling and buying at the same time. For example, how do they confirm my down payment if my down payment is coming entirely from equity in my house that I haven't sold yet? That kinda stuff. But this is the guide I wish I had before I bought my first house. Thank you.
It's a paper transaction. Your Mortgage Agent/Loan Officer will draft up the documents saying the sale of house A will pay for house B. The lawyer then uses this as instruction on closing. If there is extra, it is disseminated to the seller. This is why appraisals are so important. We need to know the money is there.
How do you know if a lender is offering you a fair rate? The lender we're pre-approved with had a 3.875% rate (on a conventional 30 year fixed with 20% down) back in November, but today when I said "hey what are your rates looking like?" I got "the best we can do is 4.25%" which kind of reeks of bullshit. I know a lot goes into what they can and can't offer, but it's difficult for me to know how competitive or not that rate is without re-shopping around (which I plan to do based on that response).
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Rates have gone through the freaking roof. If you are getting a 4.25 you were getting a stellar deal.
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You're very welcome. Will the sale of your house be completed prior to the closing on the new property?
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Your agent will always have someone they recommend because it is their referral partner. Sometimes that is a good thing, sometimes it is a bad thing. I would always recommend using someone that hopefully someone you know can recommend you to. And while this thread was never in solicitation of business I can always help people out as well. Feel free to message me if you're in need of a referral or would like me to help you.
Yikes. Makes me think twice about purchasing soon but having no idea if or when rates might go back to those levels isn't a great feeling.
Appreciate the response though, this thread is super useful!
I refinanced to a 15-year mortgage last year and Caliber now owns the note. Good experiences so far.
OP - fantastic post! I'm obsessed with mortgages as well. Will have my place paid off when I'm 60, then it's retirement time.
I just went through the whole process. I went with a local mortgage broker that my realtor recommended because I had to make an offer within 24 hours of the listing and the broker was able to get me the required pre-approval letter on a Saturday afternoon! A stark contrast to my mid-sized bank that didn't even have their loan officer contact me after my visit and request to get paperwork started for a pre-approval. -_-
Glad I went with the local broker. We scheduled for closing 4 weeks after offer got accepted but he got everything done so quickly, we could have closed in 2 weeks. We also noticed a large repair issue popup on final walk through and he was able to make all the arrangement for redoing escrows and payments within 24 hours. If that had gotten delayed even a day or so, my rate was going up from 4.125% to 4.625% if I wasn't willing to pay more to extend the lock. -_- Sure, some of the fees were more expensive but the rate was very competitive and the quick responsiveness is something worth paying for.
Hokahey - Quick question. When I pay extra into principal, is the ratio of the interest to principal in the next payment adjusted daily or monthly?
Glad I went with the local broker. We scheduled for closing 4 weeks after offer got accepted but he got everything done so quickly, we could have closed in 2 weeks. We also noticed a large repair issue popup on final walk through and he was able to make all the arrangement for redoing escrows and payments within 24 hours. If that had gotten delayed even a day or so, my rate was going up from 4.125% to 4.625% if I wasn't willing to pay more to extend the lock. -_- Sure, some of the fees were more expensive but the rate was very competitive and the quick responsiveness is something worth paying for.
Hokahey - Quick question. When I pay extra into principal, is the ratio of the interest to principal in the next payment adjusted daily or monthly?
OP
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That is interesting. Thanks!
[My previous mortgages (not in the US) calculated the interest daily to sum up into the payment at the end of the month.]
On the house poor stuff, it is frankly crazy how much you can qualify for especially if you can put some money down. I recently was relocated by my company and bought a new house without selling my old house yet, so I had to qualify for the new mortgage on top of the old one. Just the 2 mortgages they qualified me to borrow 4.4x my yearly income. If you add in the high property taxes at my new location and that reduces the amount you can borrow, it is like being qualified for 5.5x my yearly income.
Good thing I sold my old house almost right after closing, otherwise I couldn't make those payments without drawing down savings even if I cut back my monthly budget.
I'd also never recommend doing what I did unless you have a corporate relocation backstopping you. My company would buy my old house from me at appraised value at any time, so I was not really taking any risk.
Good thing I sold my old house almost right after closing, otherwise I couldn't make those payments without drawing down savings even if I cut back my monthly budget.
I'd also never recommend doing what I did unless you have a corporate relocation backstopping you. My company would buy my old house from me at appraised value at any time, so I was not really taking any risk.
I just wonder how high monthly payments are if you are putting down nothing.
We found a few properties we like that are eligible based on their address, and range from 135-200k.
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I would recommend Googling mortgage calculator, inputting the loan amount and use an interest rate in the high 4s to calculate a monthly payment. You then need to think about PMI, taxes and insurance for the property, which would probably be another $3-400 total based on the price point you're looking at.
Also, you have to qualify for that program just as much as the property does. There are Income caps and things like that. You'll definitely want to talk to a loan officer before getting too deep into planning and budgeting to make sure you even qualify.
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I used to be a relocation specific loan officer. It really is an interesting world and the benefits provided are sometimes pretty stunning. If it weren't for the relocation packages a lot of people would not be able to make the move.
The other tip I would add is that if you pull it off right, you can refinance your mortgage (called a cash-out refinance) to include your student loan debt if your equity increases. Your mortgage and interest rate will change, but if you sell the house at a gain in the future, your student debt is wiped out, gone, kaputz.
Well, going off the basis of the income maximums we would just squeak in under the highest threshold.
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Great point. People get super skittish about refinancing with rates going up, forgetting that rates tend to go up when the economy is doing well, which also tends to mean home prices are going up, which means people are gaining equity in their property. Sometimes, refinancing into a higher interest rate on a Cash out refinance and paying off other debts with that cash can work out better financially for you than keeping all of the debts the same.
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Sounds like good news, but the best advice I can give you is to assume nothing. Always best to have a loan officer check those things for you. You don't pay them for their consultative work so there's no reason not to use one, and you'll ultimately need one to close the loan anyway. You're also not stuck with whoever you have do that consultative work, and it may be a good way to gauge how helpful they are and how hard they want to work to earn your business.
We put just $40k down on the principle and cut our total interest over the life of the loan from $76K to $16K and shaved 18 years off our mortgage.
I think it should be mentioned in the OP (probably in this section) how your mortgage term affects how much interest you pay. When I did the math on our house, if we paid it off in 30 years, we would almost end up paying for it twice. 99K of just interest. If we had gotten a 15 year rate, the interest would have dropped to 36K. Huge difference. Of course, you can also make extra payments to pay off a 30 year sooner, but you're doing it at the higher rate.
That may not bother everyone, but it was a gut-punch to me. And since it's front-loaded, if you don't pay extra, you'll build very little equity in the first few years. If you end up having to move, you've basically just paid rent, because you aren't getting any of it back.
IMO, everyone should be aware of the math and how it works before you buy a house. Especially when it's so easy to over-extend yourself because loaners aren't going to turn away your free interest money. See the subprime mortgage crisis.
How bad of an idea are bridge loans?
We've found a house we really like but it needs some work. Mostly new flooring and replacing wallpaper with paint. Otherwise it's livable and we're okay with doing the other projects over time. This is the house we plan on being in until our kids are adults, after all.
We flirted with putting our current house on the market but backed off just because nothing was out there for us that met our needs.
How bad of an idea is a bridge loan to cover the cost of down payment and mortgage while we work on the potential new house and get our current house sold? Are there other options? My wife mentioned a home equity loan can be used for similar purposes, but I'm unclear.
We've found a house we really like but it needs some work. Mostly new flooring and replacing wallpaper with paint. Otherwise it's livable and we're okay with doing the other projects over time. This is the house we plan on being in until our kids are adults, after all.
We flirted with putting our current house on the market but backed off just because nothing was out there for us that met our needs.
How bad of an idea is a bridge loan to cover the cost of down payment and mortgage while we work on the potential new house and get our current house sold? Are there other options? My wife mentioned a home equity loan can be used for similar purposes, but I'm unclear.
Damn, haven't even made one payment and my loan got sold to Chase...
The Chase portal says "Next Payment Due" April 1st, 2018. The late fees start from April 15th. So should I be paying before April 1st or can I pay anytime between 1st and 15th?
(The reason I am asking is because the first payment is due to Chase but because of the loan being moved. Original lien holder said any payments after 23 March should go to Chase. Chase says any payments before 1st April should go to original loaner.)
The Chase portal says "Next Payment Due" April 1st, 2018. The late fees start from April 15th. So should I be paying before April 1st or can I pay anytime between 1st and 15th?
(The reason I am asking is because the first payment is due to Chase but because of the loan being moved. Original lien holder said any payments after 23 March should go to Chase. Chase says any payments before 1st April should go to original loaner.)
It's funny, my wife and I got two significant deposits from her parents to help us with the downpayment, and I was all prepared to explain where they came from (we got a notarized letter from her parents explaining it was a one-time gift with no expectation of repayment) ... but no one ever asked about it.
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If the deposits were made prior to the bank statements that you provided for the loan then they would not question them. If the deposits were on the bank statements, you had the laziest underwriter of all time. Haha
Without speaking for Chase (I worked for a number of large banks but Chase wasn't one) but having run into the same thing on my mortgage, what they're actually saying is the 4/1 payment should go to Chase. Given that you already have the new servicing information, they already have the back end to accept payments. You wouldn't, however, make the 3/1 payment to Chase.
And while I never advise any of my members to do it, a payment made before the 15th wouldn't be considered delinquent, yes.