Mortgage Blog

It’s the No. 1 reason that mortgage applicants nationwide get rejected: They’re carrying too much debt relative to their monthly incomes. It’s especially a deal-killer for millennials early in their careers who have to stretch every month to pay the rent and other bills.

But here’s some good news: The country’s largest source of mortgage money, Fannie Mae, soon plans to ease its debt-to-income (DTI) requirements, potentially opening the door to home-purchase mortgages for large numbers of new buyers. Fannie will be raising its DTI ceiling from the current 45 percent to 50 percent as of July 29.

DTI is essentially a ratio that compares your gross monthly income with your monthly payment on all debt accounts — credit cards, auto loans, student loans, etc., plus the projected payments on the new mortgage you are seeking. If you’ve got $7,000 in household monthly income and $3,000 in monthly debt payments, your DTI is 43 percent. If you’ve got the same income but $4,000 in debt payments, your DTI is 57 percent.

In the mortgage arena, the lower your DTI ratio, the better. The federal “qualified mortgage” rule sets the safe maximum at 43 percent, though Fannie Mae, Freddie Mac and the Federal Housing Administration all have exemptions allowing them to buy or insure loans with higher ratios.

Studies by the Federal Reserve and FICO, the credit-scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.

“We feel very comfortable” with the increased DTI ceiling, Steve Holden, Fannie’s vice president of single family analytics, told me in an interview. “What we’re seeing is that a lot of borrowers have other factors” in their credit profiles that reduce the risks associated with slightly higher DTIs. They make significant down payments, for example, or they’ve got reserves of 12 months or more set aside to handle a financial emergency without missing a mortgage payment. As a result, analysts concluded that there’s some room to treat these applicants differently than before.

Lenders are welcoming the change. “It’s a big deal,” says Joe Petrowsky, owner of Right Trac Financial Group in the Hartford, Conn., area. “There are so many clients that end up above the 45 percent debt ratio threshold” who get rejected, he said. Now they’ve got a shot.

That doesn’t mean everybody with a DTI higher than 45 percent is going to get approved under the new policy. As an applicant, you’ll still need to be vetted by Fannie’s automated underwriting system, which examines the totality of your application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes. The system weighs the good and the not-so-good in your application, and then decides whether you meet the company’s standards.

Fannie’s change may be most important to home buyers whose DTIs now limit them to just one option in the marketplace: an FHA loan. FHA traditionally has been generous when it comes to debt burdens: It allows DTIs well in excess of 50 percent for some borrowers.But FHA has a major drawback, in Petrowsky’s view. It requires most borrowers to keep paying mortgage insurance premiums for the life of the loan — long after any real risk of financial loss to FHA has disappeared. Fannie Mae, on the other hand, uses private mortgage insurance on its low-down-payment loans, the premiums on which are canceled automatically when the principal balance drops to 78 percent of the original property value. Freddie Mac, another major player in the market, also uses private mortgage insurance and sometimes will accept loan applications with DTIs above 45 percent.

The big downside with both Fannie and Freddie: Their credit-score requirements tend to be more restrictive than FHA’s. So if you have a FICO score in the mid-600s and high debt burdens, FHA may still be your main mortgage option, even with Fannie’s new, friendlier approach on DTI.

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By Kenneth R. Harney, The Washington Post

Posted by Michael and Jill Kohler on June 10th, 2017 6:48 AM

4 Things first-time homebuyers need to know!

Buying a home is likely the biggest purchase you'll ever make, and it's not always an easy one.

Low inventory has pushed home prices up in cities throughout the country, giving sellers an advantage. Homes sell fast, bidding wars break out and offers above the asking price are common.

All of this means that buyers need to be on their game and have their finances in order before entering the market.

Here's what experts said first-time buyers need to know:

1. What you can actually afford
Before buyers start their house hunt, it's important they know how much they can afford to spend.
"Start with a plan," said Chantel Bonneau, a financial adviser at Northwestern Mutual. "Don't let your imagination take over and don't let what you see from friends' houses drive your budget."
Buyers should list out all of their monthly expenses. Don't forget to include items like groceries, transportation, and discretionary spending, like gym memberships and nights out.
Related: Should real estate be part of my retirement plan?

A general rule of thumb is that housing costs shouldn't take up more than 30% of your before-tax income.

But experts said that the percentage can vary, especially if you have other debts, like student loans or car payments.

Spending too much on monthly housing payments can leave homeowners house poor, and unable to afford other expenses -- like saving for retirement.
"A home is not a good excuse to be reckless with the rest of your financial situation," said Bonneau.

In competitive markets, it's common for buyers to get pre-approved for financing to get a leg up. But experts said that just because a bank approves you for a certain amount, it doesn't mean that's what you should spend. Stick to a price limit you're comfortable with.

2. You need a buffer
While it may be tempting to throw everything you've got at your offer to stay competitive, experts recommended having at least some money left over after you close on a home.

"If buying a house takes your checking account down to $1,000, it's probably too expensive," said Bonneau.
Experts advised having at least three to six months in savings the day you become homeowners. One reason is that you'll need emergency savings now more than ever.

"You don't want a flat tire or a deductible on a medical plan to throw you into financial turmoil," said Bonneau. "When you are a homeowner, you have a lot more things that can go wrong."

If a home purchase leaves you with no liquidity, it might be worth considering waiting to increase your savings or lowering your price point, advised Neil Krishnaswamy, a certified financial planner with Exencial Wealth Advisors.

3. The true cost of owning a home
The down payment tends to be the biggest financial hurdle to owning a home, but there are many other costs that pop up along the way: appraisal, origination, credit report and notary fees can all add up.

And the costs don't stop just when the keys are handed over. There's the move, new furniture and costs like lawn care and utility payments that former renters might not be used to paying.

"I don't know if anyone truly understands the total cost of owning a home," said Krishnaswamy. "Things just continually come up that you want to do, either buy something to fill a room or fix or improve something. Most people underestimate the cost."

4. Renovations are not as seen on TV

Buying a fixer-up might allow you to snag a bigger home or afford one in a more desirable area, but experts warned there are huge risks.
"Know that it is always more expensive than what you are imagining ... or what you see on TV," said Bonneau.
If a home needs renovations, factor that into the total cost of buying, recommended Krishnaswamy.
A private loan is an option to finance the project, but can be difficult to secure, especially after just taking out a mortgage.

If your home appraises for more than you purchased it for, you could have the option of tapping your equity to help pay for renovations.

There are some mortgage options that include renovation expenses. For instance, 203k FHA loan allows homebuyers to finance the sale and rehabilitation on a single mortgage.
Another option is asking a friend or family member for a loan.

"If you are trying to secure the best low-rate loan, look at those closest to you, but be mindful of your relationship status if you can't pay back the loan," said Krishnaswamy.
Send us your money questions for a chance to be featured in Broke no more! Ask us here.

CNNMoney (New York)First published May 11, 2017: 10:38 AM ET

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Posted by Jill Kohler on May 23rd, 2017 8:19 AM

What will December's rate hike mean for First Time Home Buyers?

First Time home buyers

For the first time this year, and only the second time in the last 10 years, the Federal Reserve raised interest rates on Wednesday, a widely expected move following strengthening economic reports and signals from Fed officials.After its two-day policy meeting, the Federal Open Market Committee unanimously voted to raise the range of the federal funds rate to 0.50% and 0.75%, citing progress in economic activity and labor market growth.

What will this rate hike mean for First Time Home Buyers?

Our take on this is that it probably won't mean a whole lot in the short term.  Sure, higher rates don't help more people qualify for mortgages, but they do tend to stall inflation including housing prices which have taken a significant turn upward in the last few years. Also many likely First Time Home Buyers don't qualify far more often due to the required downpayment than income issues. Borrowers insured through FHA loan programs are still faced with coming up with a 3.5% downpayment. (That's $7000 on a $200,000 house purchase) plus the required closing costs which can range from $6000 and up for title insurance, home inspections, transfer tax, etc.
More than likely it will have a "shake the trees" effect and bring buyers into the market.  Consumers are so conditioned to interest rates being at low levels (since they've been there since 2009) that it's not been much of a concern.  With a new presidency and monetary policy coming in 2017, plus a strengthing economy, our bet is that rates will be going up at least a couple more times in 2017. If you are a First Time Home Buyer and need more information on home buying or would like a rate quote, please follow the links below.

Mortgage Rate Quote
Posted by Michael and Jill Kohler on December 14th, 2016 6:24 PM

TopTips for Pa first time home buyers


Hire a Pa licensed buyer’s agent to save you time and money

If you are considering buying a home, hire a buyer’s agent.  A licensed agent will save you time in finding the perfect home that meets your needs.  They can send you listings to view the details and photos before actually setting foot out the door.  Also, agents often know of new listings that aren’t on the market yet.  Besides, the seller is the one that will end up paying the commission, so take advantage of having professional representation on your side, it doesn’t cost you anything.


Set up the mortgage financing for your new Pa home purchase first

Think about getting the Pa mortgage loan approved before buying a home.  It is smarter to go house shopping with a mortgage preapproval letter in your hand.  When that day comes along that you want to make an offer, it will make your offer a lot stronger when the seller doesn’t have to worry so much as to you having to get mortgage financing.


Negotiate a successful deal that benefits both parties

Make sure your Pa buyer’s agent gives you a list of comparable sales in the area.  This will help you determine how much to bid on the home.  The last 3 months sales are a good gauge for you to determine what to bid.  Remember there are always more details to the offer than just the price. Examples are:  how soon you want to move, having a pre-approval, seller’s assist, and the items you want them to leave in the house. There are many details so be sure so sit back and think of the things that are important to you. This is also where your buyers agent can be invaluable as they’ve structured many deals.


Make home inspections part of the plan

You may want to make your offer contingent on the home inspection.  If you find out the home has foundation issues, you may decide against buying it.  Having a home inspection will let you know exactly what you are getting into.  Some people hate to spend another $300-$500 on the inspection, but it does give you the opportunity to address with the seller the problems of the home.  Also, it lets you negotiate the items you would like them to address. 


Remember buying a home is a step by step journey. There is no easy way there.  There are many hurdles to jump over to end up living in your dream home, but if you take them one step at a time, you’ll be well on your way to home ownership.


Source:  Http://

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Posted by Michael and Jill Kohler on July 28th, 2015 8:09 AM

More Pa parents helping kids buy homes than ever

Although Pa mortgage rates remain at low levels, many would be Pa first time home buyers just out of college lack the substantial down payment needed to purchase their first home. Think about it.  In order to put down the standard 20% on their first time home purchase of a $200,000 home.  That's $40,000! A substantial sum by anyone's standards. Add some closing costs, title insurance, an appraisal and a few standard home inspections and now we're talking about close to $50,000!

So who are they turning to?  Bank of Mom and Dad, of course! 

The average 23 year old student coming out of a 4 year college (if they are lucky enough to finish in 4 years)  just spent approximately $15,000 or more to go to a state school per year. That's $60,000 over 4 years.  Most of it likely financed through Stafford Loans or other Fafsa options. So you're coming out of college with a degree (which is great)  but maybe in debt for maybe $40,000 or more of loan payments which might kick in within the next couple of years. 

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If the student gets a $50,000 job within 6-12 months of graduating from college, their cash flow is $4000 a month or so. Quickly they move out of their parents house and begin renting (anywhere monthly from $500 on the dirt cheap side) up to $1200 a month or more for a small single family home or quite a bit more for an upscale condo.  Of course, living expenses now kick in. Heat, electric,oil, gas, food, hot water, cable, cell phone bill, new car payment, insurance, gas, taxes etc for starters, and that's not counting those school loan payments which are now due! Start adding and you can easily see how difficult it can be for a young adult to save up a substantial down payment to buy their first home. 

Enter Mom and Dad. Late 40's to mid 50's. Bought their home years ago. Maybe were lucky enough to pay it off by now, but not most people. They may have some retirement savings in a 401k and/or some equity in their home, and maybe some savings in the bank.  One way or another, many parents are in a position to help their children.

One way is through a limited 3.5% down payment FHA loan.  Mom and Dad may not have $50,000 to part with, but they may have $10,000 and that may be enough. If junior has a few thousand or more saved to buy some furnishings, etc. Mom and Dad can gift their child the down payment money and it most likely will qualify as an acceptable source of downpayment.  Sure, they'll be paying some FHA mortgage insurance on the loan, and no, it's not cheap!  But they get the house...

....and this is how we are seeing more and more young adults accomplish the dream of becoming a First Time Home Buyer today. 

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Posted by Michael and Jill Kohler on July 22nd, 2015 7:24 AM


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